A helpful list for investors
It seems that everyone has a list on almost every topic, especially at year-end and the start of a new year. I sometimes wonder what to do with this information. Anna Prior’s Jan. 2, 2015 New York Times article, “The 15 Numbers Every Investor Needs to Know” is an exception. It provides an approach to planning. Following is a condensed discussion of the article:
- Know what allocation of stocks, bonds and cash is appropriate for you. Among the many factors to consider are: your financial goals, the value of your current investments, your health, your age, and your ability to withstand a drop in the value of your investments.
- Take advantage of your ability to contribute to your employers’ 401(k) retirement plan, if applicable, for your situation. The 2015 maximum contribution is $18,000 for a pretax traditional 401(k) plan and after-tax Roth 401(k) plan. Those 50 or older can contribute an additional $6,000. Understand the requirements and impact of taking distributions from your retirement plans.
- Be familiar with the general valuations of stocks. This will help you gage your investment risk. Compare the average price/earnings (PE) ratio of stocks to the current PE. The S&P 500 is commonly used as a proxy for the stock market.
- Some consider bonds as a source of safety for investors. It is difficult to predict how bonds will perform in the short-term. The yield on the 10-year Treasury note will give you an indication of what the yield on bonds will be in the next 10 years or so.
- High investment costs will reduce your returns The expense ratios of your funds can be found in the fund prospectus, the website of the fund company and other media sources.
- Be aware of your adjusted gross income (AGI). This is the amount at the bottom of page one of you individual U.S income tax return. The AGI will determine if other taxes or limitations will apply to you. Examples are the 3.8% surtax on investment income, Medicare Part B & D premiums, deduction of some retirement plans, and some itemized deductions.
- Estate-tax exemption of the states are often lower than the U.S. estate exemption. This must be considered in your planing for your family, heirs and charitable entities.
- The amount of your essential and discretionary costs should be reviewed periodically. This is important for: retirement planning, insurance planning and maintaining an adequate reserve fund for the unexpected and untimely expenditures.
- Understand your health-care expenses. This is need for; insurance planning, retirement planning and maintaining an adequate reserve fund.
- Be aware of the difference between replacement cost and fair market value. The difference to rebuilding a home can vary from what the home would sell for. Replacing the contents of you home may be more than the fair market of the items.
- The difference between owning and renting a home can have a major impact on your cash flow and quality of life. The impact maybe more significant when buying a first home and when retiring.
- How long you are likely to live has a significant impact on your investment planning and cash flow planning.
- Your approach to borrowing and repaying loans impacts your cash flow planning, investment planning and retirement planning.
- Be aware of current and anticipated mortgage rates. These impact planning relating to refinancing and debt repayment (cash flow planning).
There are many moving factors in planning. An understanding of the parts and the alternatives are essential to a successful plan.
IRA rollover rules change in 2015
IRS previously held that the timing rules applied separately to all IRAs owned by an individual. They applied the rule to each IRA owned. The Internal Revenue Code allow a tax-free distribution if the distribution is rolled into an IRA within 60-days. The tax-free rollover is not allowed if you’ve already completed a tax-free rollover within the previous one-year (12-month) period. The Tax Court held a taxpayer may make only one nontaxable 60-day rollover within each 12-month period regardless of how many IRAs an individual owns (Bobrow v. Commissioner). The IRS will not apply the revised rule prior to 2015.
IRS issued guidance on how the revised one-rollover-per-year limit is to be applied (Announcement 2014-32).
The clarification includes the following:
1) All IRAs, including traditional, Roth, SEP, and SIMPLE IRAs, are aggregated and treated as one IRA when applying the new rule.
2) The exclusion for 2014 distributions is not absolute. Generally you can ignore rollovers of 2014 distributions when determining whether a 2015 rollover violates the new one-year-rollover-per year limit. This special transition rule will not apply if the 2015 rollover is from the same IRA that either made or received, the 2014 rollover.
The one-rollover-per-year limit does not apply to direct transfers between IRA trustees and custodians, rollovers from qualified plans to IRAs, or conversions of traditional IRAs to Roth IRAs.
In general, it’s best to avoid 60-day rollovers whenever possible. Use direct transfers (as opposed to 60-day rollovers) between IRAs, as these direct transfers aren’t subject to the one-rollover-per-year limit. The tax consequences of making a mistake can be significant. A failed rollover will be treated as a taxable distribution (with potential early-distribution penalties if you’re not yet 591/2) and a potential excess contribution to the receiving IRA.
Do you know if you will owe tax as a shareholder of a company that completes an inversion?
“Inversions” are the subject of Laura Saunders August 1, 2014 article in the Wall Street Journal, “An ‘Inversion’ Deal Could Raise Your Taxes”.
An “inversion” is when a U.S. company merges into a foreign company. Some U.S. companies (e.g. AbbVie, Applied Materials, Auxilium Pharmesuticals, Chiquita Brands International, Medtronic, Mylan, Pfizer, Salix Pharmaceuticals and Walgreen) have considered or are pursuing an “inversion” to reduce U.S. income tax.
It is expected that the “inversion” will be taxable to U.S. shareholders. Technically the U.S. company is being acquired in a taxable transaction. It is unlikely that the shareholders will receive any cash.
The tax consequences will vary based on each shareholder’s specific situation.
The net investment income tax (3.8%) will apply if your adjusted gross income (AGI) exceeds $200,000 if single and $250,000 if married filing jointly.
The long term capital gains rate is 20% if your AGI exceeds $400,000 if single and $450,000 if married filing jointly; 15% if your AGI exceeds $8,950 through $400,000 if single and $17,900 if married filing jointly.
The impact of the alternative minimum tax, itemized deduction phase-out and personal exemption are some of the other factors to consider.
Taxes will not be due if the stock is held in a traditional individual retirement account (IRA), Roth IRA, 401(k), or other tax-deferred vehicles.
Taxes are only on factor to consider, not the controlling factor, in deciding if the stock of a company considering an “inversion” should be bought, sold or held.
“Inversions” will be especially unwelcome for long-term investors who were planning to hold their shares until death for estate-planning purposes. At that point, there is no capital-gains bill, so some shareholders in firms doing “inversions” will owe taxes they would never have had to pay.”
The tax could be reduced if you have any unused losses from prior years.
Selling other stock or investments that have losses is a strategy to reduce tax from the “inversion”.
Gifting the stock to someone in a lower tax bracket (e.g. young child, grandchild, retired parent or grandparent) is another stragey to reduce the tax. The timing of the gift is important.
Contributing the stock to a charity is another approach if you have held the stock for more than a year and will have a gain. The gain will not be taxed and the value of the stock may be deductible as a charitable contribution, subject to limitations. Be sure to get a timely qualified acknowledgment. Allow enough time to complete the transaction before the “inversion”.
Among the other issues to be considered are: gift/estate taxes, “kiddie tax”, and possible retroactive legislation restricting “inversions”.
This is not intended as a complete discussion of all the factors and consequences to consider. You should consult with your personal advisers to determine what if any action is appropriate for you.
Recent tax rules permit longevity annuities (LAs) to be held in 401(k), IRA, 403(b) and other employer-sponsored individual account plans
A recent press release announcing the final rules explains that, “as boomers approach retirement and life expectancies increase, longevity income annuities can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they live.”
In general, the final rules:
• Amend the required minimum distribution (RMD) rules so payments don’t have to be taken from LAs to satisfy Required Minimum Distribution (RMD) requirements
• Set a maximum investment in an LA to the lesser of 25% of the plan account balance or $125,000 (adjusted for cost-of-living increases)
• Provide individuals with the opportunity to correct inadvertent LA premiums that exceed these limits
• State that the LA must provide that payments begin no later than the first day of the month next following the participant’s 85th birthday, although the maximum age may be adjusted later due to changes in mortality
• Allow for LAs to include “return of premium” death benefit provisions
• Expand the manner in which a contract can be identified as an LA
• Provide that LAs in qualified plans may not include “cash out” provisions, and no withdrawals are permitted in the deferral period, and, unless the optional death benefit or return of premium options are available, no payments will be made if the annuitant dies before the payment start date, although each of these restrictions may be found in LIAs that are not purchased within tax-qualified accounts
• For more information, the final rules can be read here.
Caution: This ruling will most likely have limited applicability. Taxes should not be the primary reason for financial decisions. It is a factor that should be considered after seeing how it impacts your financial plan.
What is a longevity income annuity?
A longevity annuity (LA), also referred to as a deferred income annuity or longevity insurance, is a contract between you and an insurance company. As the insured, you deposit a sum of money (premium) with the company in exchange for a stream of payments to begin at a designated future date (typically at an advanced age, such as age 80) that will last for the rest of your life. The amount of the future payments will depend on a number of factors, including the amount of your premium, your age, your life expectancy, and the time when payments are set to begin.
Caution: Guarantees are subject to the claims-paying ability and financial strength of the annuity issuer.
IRS Reverses Long-Standing Position on One-Rollover-per-Year Rule
I discussed a Tax Court case, Bobrow v. Commissioner, in my February 25th blog, “Tax Court Says One Tax-Free Rollover per Year Means just That”. I mentioned that one tax-free rollover per IRA per year was permitted by an IRS publication and proposed regulations. The decision held that a taxpayer may make only one tax-free, 60-day rollover between IRAs within each 12-month period, regardless of how many IRAs an individual maintains.
IRS will not apply this new interpretation to any rollover that involves an IRA distribution occurring before January 1, 2015.
Bobrow v. Commissioner
Mr. Bobrow (anecdotally, a tax lawyer) completed numerous rollovers from various IRAs within 60 days. This was consistent with IRS Publication 590 and the proposed regulations.
The Tax Court relied on its previous rulings, the language of the statute, and the legislative history in deciding this case. The Tax Court held that regardless of how many IRAs an individual maintains, a taxpayer may make only one nontaxable rollover within each 12-month period.
The IRS response
The IRS, in Announcement 2014-15, indicated that it will follow the Tax Court’s Bobrow decision, and apply the one-rollover-per-year rule on an aggregate basis, instead of separately to each IRA you own. However, in order to give IRA trustees and custodians time to make changes in their IRA rollover procedures and disclosure documents, the IRS will not apply this new interpretation to any rollover that involves an IRA distribution that occurs before January 1, 2015.
What this means to you
For the rest of 2014 the “old” one-rollover-per-year rule in IRS Publication 590 (see above) will apply to any IRA distributions you receive. So if you have a need to use 60-day rollovers to move funds between IRAs, you have only a limited time to do so without regard to the new Bobrow interpretation.
You can make unlimited direct transfers (as opposed to 60-day rollovers) between IRAs. Direct transfers between IRA trustees and custodians aren’t subject to the one-rollover-per-year rule. So if you don’t have a need to actually use the cash for some period of time, it’s generally safer to use the direct transfer approach, and avoid this potential problem altogether. The tax consequences of making a mistake can be significant, so don’t hesitate to consult a qualified professional before making multiple rollovers.
*Note: The one-rollover-per-year rule also applies–separately–to your Roth IRAs. Roth conversions don’t count as rollovers for this purpose.
The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment or other professional advice. Such advice requires consideration of individual circumstances. Before any action is taken based upon this information, it is essential that competent, individual, professional advice be obtained. JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other sources.
Tax Court Says One Tax-Free Rollover per Year Means Just That
| Background The Internal Revenue Code says that if you receive a distribution from an IRA, you can’t make a tax-free (60-day) rollover into another IRA if you’ve already completed a tax-free rollover within the previous 12 months. The long-standing position of the IRS, reflected in Publication 590 and proposed regulations, is that this rule applies separately to each IRA you own. Publication 590 provides the following example: “You have two traditional IRAs*, IRA-1 and IRA-2. You make a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). You cannot, within 1 year of the distribution from IRA-1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA. However, the rollover from IRA-1 into IRA-3 does not prevent you from making a tax-free rollover from IRA-2 into any other traditional IRA. This is because you have not, within the last year, rolled over, tax free, any distribution from IRA-2 or made a tax-free rollover into IRA-2.” Very clear. Clear, that is, until earlier this year, when the Tax Court considered the one-rollover-per-year-rule in the case of Bobrow v. Commissioner. Bobrow v. Commissioner On April 14, 2008, he withdrew $65,064 from IRA #1. On June 10, 2008, he repaid the full amount into IRA #1. On June 6, 2008, he withdrew $65,064 from IRA #2. On August 4, 2008, he repaid the full amount into IRA #2. Mr. Bobrow completed each rollover within 60 days. He made only one rollover from each IRA. So, according to Publication 590 and the proposed regulations, this should have been perfectly fine. However, the IRS served Mr. Bobrow with a tax deficiency notice, and the case went to the Tax Court. The IRS argued to the Court that Mr. Bobrow violated the one-rollover-per-year rule. The Tax Court agreed with the IRS, relying on its previous rulings, the language of the statute, and the legislative history. The Court held that regardless of how many IRAs he or she maintains, a taxpayer may make only one nontaxable rollover within each 12-month period. “Taxpayers may rely on a proposed regulation, although they are not required to do so. Examiners, however, should follow proposed regulations, unless the proposed regulation is in conflict with an existing final or temporary regulation (Internal Revenue Manual 4.10.7 issue resolution). “IRS Publications explain the law in plain language for taxpayers and their advisors. They typically highlight changes in the law, provide examples illustrating Service positions, and include worksheets. Publications are nonbinding on the Service and do not necessarily cover all positions for a given issue. While a good source of general information, publications should not be cited to sustain a position” (Internal Revenue Manual 4.10.7 issue resolution). This maybe why neither the IRS nor Mr. Bobrow appears to have cited the Service’s long-standing contrary position in Publication 590 and the proposed regulations. So what’s the rule now? And don’t forget–you can make unlimited direct transfers (as opposed to 60-day rollovers) between IRAs. Direct transfers between IRA trustees and custodians aren’t subject to the one-rollover-per-year rule. *The one-rollover-per-year rule also applies–separately–to your Roth IRAs. Roth conversions don’t count as a rollover for this purpose.
The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment or other professional advice. Such advice requires consideration of individual circumstances. Before any action is taken based upon this information, it is essential that competent, individual, professional advice be obtained. JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other sources. |
There’s Still Time to Contribute to an IRA for 2012
There’s still time to make a regular IRA contribution for 2012! You have until your tax return due date (not including extensions) to contribute up to $5,000 for 2012 ($6,000 if you were age 50 by December 31, 2012). For most taxpayers, the contribution deadline for 2012 is April 15, 2013.
You can contribute to a traditional IRA, a Roth IRA, or both, as long as your total contributions don’t exceed the annual limit. You may also be able to contribute to an IRA for your spouse for 2012, even if your spouse didn’t have any 2012 income.
Traditional IRA
You can contribute to a traditional IRA for 2012 if you had taxable compensation and you were not age 70½ by December 31, 2012. However, if you or your spouse was covered by an employer-sponsored retirement plan in 2012, then your ability to deduct your contributions may be limited or eliminated depending on your filing status and your modified adjusted gross income (MAGI) (see table below). Even if you can’t deduct your traditional IRA contribution, you can always make nondeductible (after-tax) contributions to a traditional IRA, regardless of your income level. However, in most cases, if you’re eligible, you’ll be better off contributing to a Roth IRA instead of making nondeductible contributions to a traditional IRA.
2012 income phaseout ranges for determining deductibility of traditional IRA contributions:
1. Covered by an employer-sponsored plan and filing as:
a. Your IRA deduction is reduced if your MAGI is:
Single/Head of household: $58,000 to $68,000
Married filing jointly: $92,000 to $112,000
Married filing separately: $0 to $10,000
b. Your IRA deduction is eliminated if your MAGI is:
Single/Head of household: $68,000 or more
Married filing jointly$112,000 or more
Married filing separately: $10,000 or more
2. Not covered by an employer-sponsored retirement plan, but filing joint return with a spouse who is covered by a plan
a. Your IRA deduction is reduced if your MAGI is: $173,000 to $183,000
b. Your IRA deduction is eliminated if your MAGI is: $183,000 or more
Roth IRA
You can contribute to a Roth IRA if your MAGI is within certain dollar limits (even if you’re 70½ or older).
For 2012, if you file your federal tax return as single or head of household, you can make a full Roth contribution if your income is $110,000 or less. Your maximum contribution is phased out if your income is between $110,000 and $125,000, and you can’t contribute at all if your income is $125,000 or more.
Similarly, if you’re married and file a joint federal tax return, you can make a full Roth contribution if your income is $173,000 or less. Your contribution is phased out if your income is between $173,000 and $183,000, and you can’t contribute at all if your income is $183,000 or more. And if you’re married filing separately, your contribution phases out with any income over $0, and you can’t contribute at all if your income is $10,000 or more.
Even if you can’t make an annual contribution to a Roth IRA because of the income limits, there’s an easy workaround. If you haven’t yet reached age 70½, you can simply make a nondeductible contribution to a traditional IRA, and then immediately convert that traditional IRA to a Roth IRA. Keep in mind, however, that you’ll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own–other than IRAs you’ve inherited–when you calculate the taxable portion of your conversion.
Finally, keep in mind that if you make a contribution to a Roth IRA for 2012–no matter how small–by your tax return due date, and this is your first Roth IRA contribution, your five-year holding period for identifying qualified distributions from all your Roth IRAs (other than inherited accounts) will start on January 1, 2012.
New rules for 401(k), 403(b), and 457(b) in-plan Roth conversions in the American Taxpayer Relief Act of 2012
The American Taxpayer Relief Act of 2012 (ATRA), enacted to avoid the fiscal cliff, includes a provision that may be important to certain retirement plan participants. ATRA makes it easier to make Roth conversions inside your 401(k) plan (if your plan permits).
A 401(k) in-plan Roth conversion (also called an “in-plan Roth rollover”) allows you to transfer the non-Roth portion of your 401(k) plan account (for example, your pretax contributions and company match) into a designated Roth account within the same plan. You’ll have to pay federal income tax now on the amount you convert, but qualified distributions from your Roth account in the future will be entirely income tax free. Also, the 10% early distribution penalty generally doesn’t apply to amounts you convert.
While in-plan conversions have been around since 2010, they haven’t been widely used, because they were available only if you were otherwise entitled to a distribution from your plan–for example, upon terminating employment, turning 59½, becoming disabled, or in other limited circumstances.
ATRA has eliminated the requirement that you be eligible for a distribution from the plan in order to make an in-plan conversion. Beginning in 2013, if your plan permits, you can convert any part of your traditional 401(k) plan account into a designated Roth account. The new law also applies to 403(b) and 457(b) plans that allow Roth contributions.
This provision will not be beneficial to all participates of plans the permit an in-plan Roth conversion. There are many factors to consider in deciding if it could be beneficial to you. Be sure to evaluate your current and future tax situation when making the decision.
