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.
The House Ways and Means Committee recently passed the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act).
This bill includes a number of measures designed to strengthen retirement savings. With regard to IRAs, the bill would treat certain taxable non-tuition fellowship and stipend payments as compensation for purposes of making a contribution and would remove the prohibition on traditional IRA contributions for those age 70 ½ and over. It would also allow penalty-free distributions for any “qualified birth or adoption distributions” and would increase the age when required minimum distributions must begin from age 70 ½ to age 72.
Buried in the SECURE Act is some bad news for many retirement account owners. As a revenue raiser, the SECURE Act would essentially do away with the stretch IRA as we now know it. The proposed legislation would change the rules for defined contribution plans and IRAs upon the death of the account owner.
y son does not much care for broccoli. However, he knows it is for the greater good, and I insist he grow strong and healthy. As long as he lives under my roof, I could feed him broccoli for both lunch and dinner. Double broccoli is legal. But we both agree that would be excessively penal. The boy knows that if he eats broccoli for lunch, it will not be on the table for dinner. If he does not eat broccoli for lunch, then he must eat broccoli at dinner to stay in compliance with house rules.
A recent court case (Schermer vs. Commissioner of Internal Revenue) had nothing to do with vegetables. Nevertheless, as repulsive as double broccoli is to my son, the Schermer case dealt with an equally unappetizing topic – legal double taxation.
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).
Today is April 15, 2019. This is deadline for filing your 2018 federal income tax return, unless you have an extension. This tax season was the first one where we saw the impact of the Tax Cuts and Jobs Act. Wholesale changes to the tax code made this a more interesting and unpredictable tax season than usual. Many taxpayers had lots of uncertainty about what tax reform would mean for their 2018 federal income tax returns. As we reach the tax-filing deadline, here are two IRA lessons we learned this tax season:
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.
Unfortunately, it happened again. Another person dove into the IRA rollover pool before checking the depth, temperature, or if the pool was even open for swimming. In this scenario, $125,000 was rolled from an IRA at Bank A to Bank B. A few months later, in a constant search for a higher paying certificate of deposit, the account owner rolled the same $125,000 to an IRA at Bank C.
Spot the problem(s)? This relatively innocuous-looking transaction created a laundry list of snowballing issues. Probably the most penal is that the second rollover attempt was invalid and is treated as a distribution. The $125,000 is now taxable earned income for the year. Why? A person is permitted only one (1) 60-day rollover per 12-month period with their IRA accounts. This does NOT mean one rollover per calendar year.
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.
