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DISCLAIMER
The information provided below is intended to be general in nature and may not be appropriate for your individual situation. You should consult with your personal financial advisor before following any advice or recommendation given on this web site. As we cannot guarantee the validity, accuracy or adequacy of the information provided by individuals who send in questions, Winer Wealth Management, Inc. is not responsible for the consequences of any actions taken based on the information we provide. |
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Question: I am 23 years old, and just landed my first "real job", which includes my first IRA. I work for a small company that will put 2% of my salary into the IRA. So how much should I be contributing? I have heard a variety of different answers, anywhere from 8-20%, is what I should be putting away. How much do you recommend, I have very little expenses, because I still live at home. Thanks for your help!
Lauren M., Annapolis, MD
IRA Expert: If you can afford to do so, I would make the maximum allowable contribution. If it's a SIMPLE Plan, that would be $10,000 for 2005. Check with your company.
If you can afford to make the maximum contribution today, at your age, you will be getting off to a great start in your retirement savings. You can't imagine how many people in their 30s, 40s, 50s, 60s, etc. wish they had started saving for retirement at your age. If you contribute $10,000 today and never add another dime; at an 8% annual rate of return you would have $79,880 when you turn 50. Now, just imagine how much you could have if you made the maximum contribution each and every year.
Because you wrote that you live at home and have "very little expenses," this may be the best opportunity you have to jump start your retirement savings. In future years, you may not be able to make the maximum contribution because of additional expenses and responsibilities. So do yourself a favor and take advantage of this time and opportunity. The sooner you start and the more you can put away each year for retirement the better.
Question: I recently left a company that contributed to a retirement plan in my name, though they stopped contributions in 1998. I am eligible for benefits after age 55, I'm currently 49. My wife and I made from 200k-250k the last 3 years and it's been my understanding we were only able to contribute to the company 401k, not any type IRA.
Here's the issue: I've left that company, joining one that has no 401k at this point. Income will be close to the same, at least 175k. So... since I'm still 'covered' by a future retirement plan, and have no 401k access, and cannot utilize IRA's... do I settle for stuffing twenties in a mattress?
Scott L., Alta Loma, CA
IRA Expert: I have some good news and some bad news for you. The good news is that both you and your wife can make fully tax-deductible contributions to two separate IRAs regardless of your level of income, as long as neither one of you work for a company that currently offers a retirement plan. It was my impression from your e-mail that neither you nor your wife have a company retirement plan available to you at the present time. And if that was the case in the past three years, then you and your wife were both eligible to make tax-deductible IRA contributions in each of the past three years. In fact, at your income level, the tax deduction would be beneficial. The future income you will receive from your previous employer's retirement plan is not an issue. Your eligibility to make tax-deductible contributions today to an IRA is determined by whether or not you have a company retirement plan to which current tax-year contributions can be made available to you at this time. The bad news is that your IRA contributions are limited to $4,000 each for 2005, or $4,500 for individuals over age 50.
As always, consult with your CPA or financial advisor before you do anything.
Question: Is there a maximum gross limiting size of an IRA over which amount funds must be distributed regardless of the age of the owner?
Jonathan M., San Rafael, CA
IRA Expert: No. Your IRA can grow into the millions and billions, and age will still be the only factor that determines when you must begin taking required distributions. That's why it's so important to make sure that you know when and how to take distributions from your IRA, and how to incorporate your IRA into your estate plan so that your beneficiaries are able to implement the Stretch IRA and parlay your IRA into a fortune. You also need to educate your beneficiaries about how to inherit your IRA.
The larger the IRA, the more important it is that it is that distributions are taken properly, that it is handled properly in your estate plan and that your beneficiaries inherit it properly. Unfortunately, the general public and their financial advisors commonly make mistakes that end up in the inadvertent liquidation of an IRA or the inability to implement the Stretch IRA, one of the most powerful wealth-building vehicles available to you and your family. Whether your IRA is large or small, don't let that happen to you or your beneficiaries.
Question: Is there a 15% excise tax for withdrawals in excess of $150,000 per year and if so is there any way to mitigate the tax. Thanks.
Jonathan M., San Rafael, CA
IRA Expert: No.
Followup Question: I have attached a pdf from some CPA journal I tripped across. I have bookmarked and highlighted the section on the 15% excise tax.
IRA Expert: Jonathan, You have encountered one of the biggest problems with doing research on the Internet. The article you cited was the first link to come up when I searched in Google for information on the 15% excise tax. And as you noted, the article talks about a 15% excise tax on IRA distributions over $150,000. However, that article was from 1993! The excise tax was repealed in 1997. There were a lot of other OLD articles that mentioned the 15% excise tax. Doing such critical planning based on old information can cause you serious problems. Two of the primary reasons why I'm a member of Ed Slott's Elite IRA Advisor Group are because Ed is one of the leading IRA experts in the country and our group is dedicated to staying on top of the latest IRS rulings and laws related to IRAs and other retirement plans. If there's ever something I'm not sure about, I have access to the top IRA experts in the country—the experts' experts. I didn't need Ed on this one.
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Question: When the IRA owner dies, is the value of the IRA part of the owner's estate, or does the amount go directly to the beneficiary?
Harriet G., Location Unknown
IRA Expert: Under current tax law, if you pass away with a taxable estate that exceeds $1.5 million, your IRA balance will be included in your estate for federal estate-tax purposes. However, the estate tax does not not have to be paid from the funds in the IRA, which means that the IRA can be passed intact to the beneficiary. But it's not really as simple as that. For example, if you leave an IRA to your spouse, it would not be subject to estate tax. However, when he dies, if the value of his taxable estate exceeds $1.5 million, the remaining portion of the the IRA may be subject to estate taxes.
You have touched on an interesting and complex subject. Most people don't realize that the tax laws surrounding IRAs are among the most complex of any financial asset. That's one of the reasons why IRAs are almost always ignored or handled poorly by estate planning attorneys in their clients' estate plans, which almost always costs their clients and their clients' beneficiaries a fortune in excess, unnecessary income and estate taxes. When handled properly, your beneficiaries can parlay your IRA into a family fortune.
You may also notice that most financial advisors focus their attention on helping clients invest the money in their IRAs and neglect advising them about how to take money out of their IRAs in the most tax efficient manner, how to incorporate their IRAs into their estate plans and how to implement the Stretch IRA, which can allow their beneficiaries to parlay their IRA into a fortune. With the right planning, even a modest IRA can generate millions of dollars in income and create multi-generational wealth.
Far too often, critical IRA mistakes are made in the estate planning process and in the process of inheriting an IRA. One of the most commonly overlooked tax deductions is the IRD deduction which applies to distributions from an inherited IRA that was subject to estate taxes. I know firsthand that the IRD deduction is commonly overlooked by CPAs, which in turn costs their clients a fortune in excess, unnecessary taxes. I recently alerted three sisters to the fact that their CPAs had missed the IRD deduction on their inherited IRAs and, with my help, they will now receive an annual tax deduction around $20,000 for the lives of their inherited IRAs. You can read the story about how I helped these women in an upcoming article in the Wall Street Journal.
Question: What happens if you rollover a 401k into a brokerage IRA and after several years you have lost most of the value? What are your tax liabilities?
Chuck W., Denton, TX
IRA Expert: Unfortunately, losses in a rollover IRA (or even your previous 401k) are not tax-deductible and cannot be used to offset gains inside or outside of your IRA. When you take withdrawals, you will pay income tax on the distributions at your tax rate.
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Question: When can you start making tax free withdrawals from a Roth IRA?
Derek L., Location Unknown
IRA Expert: You can begin taking tax and penalty-free withdrawals from a Roth IRA at age 59 ½ . However, you must have held the Roth IRA for at least five years to be eligible to withdraw the earnings tax-free. For example, if you open a Roth IRA at age 57, you would not be able to take tax and penalty-free withdrawals of earnings until five years later, when you would be age 62. Because contributions to Roth IRAs are made with after-tax money, you can withdraw amounts up to the total of your contributions with no tax consequences at any time.
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Question: My father had a living trust stating that everything was to be divided 4 ways between my brothers and sister. He passed away Dec.2003. In the summer of 2004, my brother who is the trustee (I'm second in line to be the trustee if anything happened to him) and my mother went and changed the IRA so that my brothers get 40% and my sister and me get 10%. This was done out of hate and jealousy and alcoholism on my mothers part. She passed away in March of this year. My father and I were very close and she always resented that. My father told me many times that he wanted everything divided equally. I asked about any doubts with his wishes being granted and he said with my brother in charge there wouldn't be any problems. I don't know why brother has become this way. I told him this could still be divided 4 ways but he won't budge. I have also asked for a copy for the trust numerous times and still have not received it. The investor said we all need to sign a form in agreement on how the funds are to be disbursed before he can release the funds.
I have 2 questions if you don't mind. 1) Can this change that was made be challenged? 2) What happens if I don't sign the consent form to distribute the monies? (my thought being he might come around and do what my father wanted and also get a copy of the trust.) My father was my hero and I just want his wishes followed through. He would be so upset if he knew what was going on.
If you can give me any guidance at all, I would really appreciate it.
Jo S., Aurora, CO
IRA Expert: As far as your father's IRA goes, your claim that it should be divided evenly depends on who your father listed as his designated beneficiary or beneficiaries, and how the IRA was handled after his death. If your mother was the sole designated beneficiary of his IRA, then she could have inherited the IRA and have named you and your siblings, or anyone else, as beneficiaries in any manner she chose. If the IRA was originally left to you and your siblings or you, your siblings and your mother, then they could not have changed the beneficiaries or the allocation to any beneficiary.
The first thing I would suggest that you do is to contact the bank or brokerage firm where your father's IRA was originally held. Ask them to provide you with a copy of the beneficiary form. If your mother was the sole designated beneficiary, then you are probably out of luck. If you or other beneficiaries were named, then there's hope. Let me know what you find out.
As far as your challenging the will and trust, you should consult with a good attorney. I can provide you with a referral, if you like, however they will be in Los Angeles. You may want to consult with someone in your local area.
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Question: I have an educational IRA set up for my son, and I was wondering if I can buy a car as transportation to and from college with the funds?
Wesley B., Raleigh, NC
IRA Expert: The funds in your Coverdell Education Savings Account must be used for legitimate educational expenses. Any funds withdrawn for expenses deemed illegitimate by the IRS would be subject to taxes and penalties.
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Question: My father recently passed away and left me the beneficiary of his traditional IRA. However the will states that all of his estate must be split evenly between myself and two brothers including the IRA. Question one, since the will states to split everything, can we split the IRA three ways into each of our own IRAs? Question two, can we use the IRA to pay his past medical bills tax free? Question three, my father took out two loans from his credit union and used his IRA as collateral for the loan. Can we use the IRA to pay off the loan tax free? Any other suggestions?
Bryan M., Castle Rock, CO
IRA Expert: If the beneficiary form states that you are the sole designated beneficiary, then you are the sole beneficiary regardless of what's stated in your father's will. The beneficiary form takes precedence over wills and trusts. In regard to paying off the loans and medical bills with funds from the IRA, I would recommend that you use other funds. Any distributions from the IRA would be taxable. If you handle the transfer of funds properly, you can spread the distributions from your father's IRA out over your lifetime and possibly on to your children. The decision as to whether or not you want to split the IRA with your brothers is solely up to you. However, if contingent beneficiaries other than your brothers are listed on the beneficiary form, then anything you disclaim would have to go to those beneficiaries, again regardless of what's stated in your father's will.
Obviously, mistakes were made in planning for the post-death distribution of your father's IRA. Most people assume that their estate planning attorneys have incorporated their IRAs into their estate plans. Almost always that's not the case. Your father's IRA is a classic example of what can happen when mistakes are made or important issues are overlooked in the estate planning process.
Inheriting an IRA is no easier than planning for its distribution after death. There are a number of things that must be done properly if you are to avoid inadvertently liquidating the IRA and losing the ability to stretch the distributions out over your lifetime. It's important for you to remember that you, as a non-spouse beneficiary, cannot do a rollover. The funds from your father's IRA must be transferred to a beneficiary IRA and the transfer must be done properly. Make sure that your financial advisor is up to speed on how to inherit an IRA, in order to avoid getting bad advice and making any critical mistakes. See how he or she measures up to our test in the IRA Center on www.winercapital.com.
Our Complete IRA Care Solution utilizes a 106 point checklist to ensure that nothing is overlooked and no mistakes are made in the process of inheriting IRAs or leaving one to your beneficiaries. If you're concerned about your financial advisor's ability to assist you or concerned about doing things on your own, call my office at (818) 673-1695. I would be happy to assist you.
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Question: I am married, file jointly, have an employer contribution pension, and my adjusted gross income is $90,000/yr. Can I take a Roth IRA and if so what are the amounts for Roth IRAs for corresponding income?
Dan B., Sauk City, WI
IRA Expert: A married couple with earned income who file jointly and have an adjusted gross income of less than $160,000 may each contribute $4,000 a year to a Roth IRA in 2005. Individuals over age 50 can contribute an additional $500 ($4,500 total) in accordance with the "catch-up" provision. You may also be eligible to convert funds in a traditional or rollover IRA to a Roth IRA. You should discuss your eligibility to do so and the pros and cons with your tax advisor.
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Question: My father passed away in Dec. '03. He was 71. My mother has received a letter, addressed to my father, stating she must withdraw money from his IRA or be penalized. At the time of his death, she tried to get his IRA put in her name but her banker said it would not matter as she was listed as the beneficiary. She is 69. How can she get this IRA in her name and is she liable for the withdrawal or penalty?
Doug P., Hartwell, GA
IRA Expert: Doug, please fax me a copy of the letter your mother received. Also, please explain further what happened at the time your father passed away. As I understand it, your mother asked to have the IRA transferred into her name and her banker advised her not to do so. Is the account still in your father's name? Is there only one account? Please fax me a copy of the most recent account statement so that I can see how the account is titled. Also, who is currently listed as the beneficiary if your mother dies?
It appears that some serious mistakes have been made. Let's see if we can fix them. Please get me the information as soon as possible as corrective action, if possible, should be taken as soon as possible.
Doug P: Since I sent this e-mail this morning, my mother has contacted the bank. They had thought that the IRA had been transferred to her name. The beneficiary was changed to my sister and I after my father's death, but his name is still on the account. The bank is recommending to close out the IRA and set it back up in her name and to ignore the "computer generated" letter about the need to take a mandatory withdrawal. My new question is: If we close the account and set it back up, are there tax penalties involved? It would seem to me that you have accepted the money from the IRA and then reinvested it into another one, therefore it appears as an early distribution. Her banker is saying there will be none.
P.S. I cannot fax you a copy of the letter as it contains info that I do not feel comfortable giving out. Hope you understand.
IRA Expert: Doug: I respect that you do not yet feel comfortable faxing me the information I requested. Financial planning involves personal information and a successful financial planning relationship requires that you feel comfortable sharing your personal information with a trusted advisor. Along the same lines, you will note that on my web site, I state that I can only provide general information on my web site. Your situation and your new questions require that we provide each other additional specific information. And because I am liable for the information I provide, I charge a fee for my financial planning and advisory services. I would need to know all of the details of your situation before I could tell you what that might cost. I might also be able to assist you at no cost if you were interested in retaining me to assist your family with the management of the IRA account (or any other accounts). As a Registered Investment Advisor, I manage investment assets for clients through either Fidelity or TD Waterhouse [now TD Ameritrade]for a fee based on the amount of assets under management. If your bank’s management services are anything like the advice they appear to have given you (or not given you), you should seriously consider making a change. In fact, your bank has done your family a disservice and exposed you to some serious tax problems. Here’s why.
You wrote that the bank thought that the IRA had been transferred to your mother’s name. It wasn’t. Shouldn’t they know that information? The answer is YES, they should. And the fact that they don’t is scary.
Obviously your mother was the initial beneficiary. In order for her to have given the IRA to you and your sister, she would have to have disclaimed the IRA. Did the bank ever explain to you, your sister or your mother the advantages and disadvantages of changing the designated beneficiaries? Each decision has its own set of consequences. There are also deadlines by when decisions must be made and actions must be taken. Here’s where the news gets worse…
Based on the limited information in your e-mails, someone made the decision to change the beneficiary to you and your sister, but the IRA was not split by December 31 of the year following your father’s death. Had the IRA been split by the December 31 deadline, you and your sister could have each taken distributions over your own life expectancies. But if the IRA is still in your father’s name, it obviously was not split. That means that you and your sister can split the IRA, but you will both have to take distributions over the oldest beneficiary’s life expectancy. Now, you might want to sit down.
If you and your sister are currently the named designated beneficiaries and your father died in 2003, you and your sister were required by the IRS to begin taking your required minimum distributions in 2004 based on the oldest beneficiary’s life expectancy. The IRS penalty for not taking a required minimum distribution is 50% of the amount that was supposed to have been taken. So, as you can see, your bank has not only given you bad advice and no advice, they have also exposed you and your sister to a substantial IRS penalty.
I do not believe that someone who has disclaimed an IRA can turn around and reclaim it, especially after you and your sister were supposed to have begun taking required minimum distributions. That’s why the bank’s new recommendation sounds somewhat irresponsible. Your bank should have known that you and your sister were supposed to have taken RMDs in 2004 and they were by law supposed to have given that information to the IRS. Consequently, the IRS should know that you and your sister are supposed to be taking required minimum distributions. That would make it even more likely that they might find out about your changing things back to their original status at the bank’s recommendation. The IRS could potentially disallow the IRA and you and your sister might be subject to paying taxes on the entire amount of the IRA plus fees and penalties. I don’t even want to get into how your mother’s bank planned to change things back. You need to take your RMDs and you need to change IRA custodians before you end up with a whopping 50% IRS penalty and more problems.
There are things you can do to clean up this mess and get straight with the IRS. But don’t wait too long.
If you review the information on my web site (www.winercapital.com), you'll learn about who I am, what I do and how I do it. If that gives you more comfort in sharing information with me, then I would welcome the opportunity to assist you and your family members. I’ve also enclosed a copy of my monthly newsletter. If you like, you can call me at (818) 673-1695 x201.
Also, I don’t exactly know where you live but I will be in Atlanta on Friday for an Elite IRA Advisor Group meeting. Hope this helps.
Doug P: I appreciate your advice and your response. I will discuss this with the bank and my mother. I will also consider your offer to manage these accounts, as well as my own. THANKS for your time!!!!
IRA Expert: Doug: I love what I do, helping people like you and your family. I feel bad that you and your family have not been well advised and hope I can help you put things in order.
As with all the others who have written to me, it’s my hope that your story (which sadly is not unusual) and my advice will help others in the same situation. Hopefully it will keep others from getting into your situation.
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Question: I opened an IRA with a company 15 years ago. We had a fire several years ago and lost all paperwork. I don't recall the company name. How would I locate my IRA? Thank you for any help you can give me.
Gary G., Bloomfield, KY
IRA Expert: Gary, that’s a tough one. I’ve never heard of anyone losing track of an IRA. Even after a fire, you should have continued to receive statements from your IRA custodian. If you moved, those statements should have been forwarded to your new address.
Here are my suggestions:
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If you have held bank or brokerage accounts in the past, check with those institutions to see if any of them have or had your IRA.
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If you can’t remember the names of any banks or brokerage firms with which you may have done business, file IRS Form 4506 to obtain copies of past tax returns. Taxable investments, investment accounts and financial institutions are generally listed on IRS Form 1040, Schedule B. Perhaps one of the names listed was your IRA account custodian.
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Call any and every bank and brokerage firm in your local area to see if any has or had your IRA. It will be time consuming. But if you don’t remember where you held your IRA, you might not remember how much money was in it. Perhaps it’s grown over the past 15 years.
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Check with your State treasurer’s office. After a certain period of time, unclaimed funds or property are generally turned over to the state. If your former IRA account custodian was unable to locate you, they may have done just that. You can often check for unclaimed property on your State treasurer's web site.
I hope this helps. Please let me know how things turn out.
Now, for those of you who think that couldn't happen to you...
Question: My mother has a pension out there somewhere. My sister and brother threw everything away in her room. Now we don't know where the pension is located. She passed away in February of 2005. How can I find out where her financial assets are?
Sherry (Location Unknown)
IRA Expert: See above.
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Question: I recently changed jobs. Should I move my old 401(K) from my previous employer to my new employer's 401(K) plan or roll it into an IRA?
David B., Encino, CA
IRA Expert: I generally recommend that individuals who have changed jobs roll their 401(k) plans from previous employers into an IRA. While individual circumstances vary, the primary reason why you would consider keeping your 401(K) with your old employer or rolling it into your new employer's plan would be if you were concerned about liability, creditor protection and being sued. While the recent Supreme Court ruling and Bankruptcy Reform Bill provide IRAs Federal creditor protection in bankruptcy, they do not provide the level of creditor protection found in ERISA qualified retirement plans such as a 401(K).
If liability and creditor protection are not an issue, then it is generally best to roll over a 401(K) from a former employer to an IRA. Most IRAs offer a wider variety of quality investment options and greater control over your investments. No-fee IRAs are available from various custodians. Having your money in an IRA and naming a designated beneficiary will guarantee that your beneficiary will be able to take full advantage of the stretch provisions enable him (or her) to stretch the distributions from your inherited IRA out over his or her lifetime, or the lifetime of his or her beneficiaries.
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Question: Can my sister and I split an IRA we inherited from our mother into two separate IRAs?
Janice L., Santa Barbara, CA
IRA Expert: Yes. As long as the IRA is split before December 31 of the year following your mother's death, you and your sister can split your mother's IRA and receive separate IRA account treatment, which means that you can both take distributions based on your individual life expectancies. If the IRA is split after December 31, you would only be able to take distributions based on the life expectancy of the oldest beneficiary. To ensure your ability to split the IRA and take distributions based on your individual life expectancies, it's best to split the IRA before September 30th in the year following your mother's death, which is also the date by which designated beneficiaries must be named.
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