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To discourage early access to amounts invested in IRAs and company retirement plans, the IRS imposes a 10% early distribution penalty on withdrawals before age 59 ½. Even though Roth IRAs consist of after-tax contributions, the penalty could also apply to converted amounts or earnings. There are several exceptions to the 10% early distribution penalty, which means taxpayers should be familiar with these before electing a distribution. Doing so will help them possibly avoid this penalty.

et Unrealized Appreciation (“NUA”) is a powerful tool that people with employer stock in company plans should be aware of. Under this tax concept, the gains on the employer stock that are distributed according to the NUA rules are subject to long term capital gains rates when sold. That could be a huge tax break for some people. Normally, distributions from a company plan are subject to ordinary income tax rates, which while dependent on income are generally going to be higher than long-term capital gains rates. Of course, there’s a catch: the basis in that stock is taxed at ordinary income tax rates in the year of the distribution. Because of this, the first step in any NUA analysis is to determine whether the company stock is highly appreciated enough to justify accelerating the taxes.

Question: My sister is 72 years old and quite philanthropic. Much of her traditional IRA RMD she donates to various charities. Is it possible for her to instruct the IRA trustee to send the money directly from her IRA account to the charities? How will the charities acknowledge receipt from my sister so she can deduct the donations on her taxes? Is she still taxable on the RMD directed to the charity? Keep up the great work and thank you. Edward Answer: Hi Edward, It is great that your sister is charitably inclined. If she is already donating funds distributed from her IRA to charity, she may be a good candidate for Qualified Charitable Distributions (QCD). With a QCD the funds would be transferred directly from her IRA to the public charity of her choice.

First, thank you for the educational opportunity via the mailbag services. I'm 70 years old (will be 70 1/2 in July this year). I retired in 2014. I have a 401K account (consisting of highly appreciated stocks and cash) with my former employer. Although the majority of the money is pre-taxed, I do have a small portion of the money in in-plan Roth which was established in 2016. Not knowing the NUA advantage, I made several withdrawals and Roth conversions between 2015 - 2017. From reading the NUA rules, I thought I had lost the NUA privilege for good. However, when I call the saving account administrator, they said that since I have not made any withdrawals in 2018, I still qualify for the NUA treatment this year. This is conflicting information to my understanding.

If the dictionary had pictures next to each word, the U.S. Tax Code would fit nicely next to the definition of “esoteric.” But as we all know, this complex web of rules and regulations cannot be ignored. Mistakes cost money, in the form of extra taxes, penalties, and interest. Some mistakes can be fixed, but not all. Even those that can be fixed may incur IRS user fees or, at the least, professional costs to unwind the transaction. To avoid the consequences, you must clearly understand all the applicable rules. There’s an old saying: “close only counts with horseshoes and hand grenades.” That is indeed the case when it comes to complying with the tax code. So, while there are literally hundreds of mistakes someone could make with retirement plan money, I wanted to highlight some of the more common ones (not in any particular order).

Question: Hello, I have a question for a situation I have never come across before. I have a client that just found out they missed taking their RMD’s from one of their retirement accounts for the last 5 years! Assuming they take the missed distributions in March 2019, what form will the broker report this on? Will it be a Form 1099-R for 2019? Or will he get a corrected Form 1099-R for 2015, 2016, 2017…? Also, what code will be used in box 7 to indicate that this is a correction of the missed RMD’s? Thank you for any help you can give! Regards, Deborah Answer: Deborah, Missing RMDs is a common occurrence and there is a definitive fix. The missed RMD should be taken as soon as possible. The RMD will be taxable in the year it is withdrawn, so the missed RMDs will all be included on the 2019 Form 1099-R.

Most people are aware of the tax concept, Required Minimum Distributions or “RMDs.” These are the tax rules that force you to take a distribution from your IRA or qualified plan, even when you don’t want to. Moreover, that distribution is usually taxable, and it cannot be rolled over! The calculation is always the same: you divide the account balance as of December 31st of the previous year (adjusted for any outstanding rollovers and transfers) by the appropriate life expectancy factor. What often confuses people are the starting points and the applicable expectancy factor. Use the checklist below to keep some of these rules straight: IRA Owner: RMDs must be made by April 1st following the year you reach age 70 ½. After that initial distribution, the deadline shifts. You still receive an RMD, but it must be made by December 31st. Because of this, waiting until the April 1st deadline means while you pay taxes on two RMDs in the same year.

Are you a small business owner or a sole proprietor? If so, you may use a Simplified Employee Pension (SEP) IRA plan to save for retirement. These plans are a popular choice for small businesses because they are inexpensive and easier to administer than other retirement plans. While SEPs are pretty straight forward, there are some rules that may surprise you How a SEP Works Contributions, which are tax-deductible for the business or individual, go into a traditional IRA established by the employee. Only the employer can make SEP contributions. Employees do not make SEP contributions.

A little house on Easy Street has one front door. It is a traditional IRA. There is a sign above the lone entry point the reads, “To All Those That Enter, Thy Earnings Will be Taxable.” It does not matter if the money that enters through the front door is a contribution or rollover or transfer. Most of the arriving dollars, and all of the earnings on those dollars, will be taxable when they leave. (Some money that passes through the front door of the traditional IRA house will receive a special wristband the reads “BASIS” and it will not be taxable upon departure. However, those “Basis” visitors will still enter through the single door beneath the “Earnings Will be Taxable” sign.) Every traditional IRA home can be decorated differently. This particular traditional IRA house has an ETF sofa, an individual stock leather chair, and a couple of mutual fund recliners. The traditional IRA across the street might have four ETF sofas, or the living room may well be adorned with a dozen mutual fund folding chairs.

Question: Planning Question - for retirement plans that permit Non Roth After Tax Contributions, could the company use Qualified Matching Contributions (QMACs) for the NHCEs to satisfy the ADP & ACP testing allowing the HCEs to max out their 415(c) ceiling above their own deferrals and company match contribution? Or, is there a better way for the HCEs to max out up to the 415(c) ceiling? Rick Answer: Rick, Qualified Matching Contributions, or “QMACs,” are used to help plans pass the Actual Contributions Percentage Test (ACP). Since after-tax contributions are included in the ACP Test, QMACs can be used to help plans pass