How to avoid this common IRA rollover mistake

The once-per-year limit on IRA-to-IRA rollovers is a terrible trap for unwary taxpayers. It’s easy to fall into, but also easy to avoid. Here is the rule: If you receive a distribution from an IRA, you cannot roll that distribution over into any IRA if the distribution is received by you less than 12 months after another IRA distribution you received that you rolled over into an IRA. That’s according to Internal Revenue Code Section 408(d)(3)(B). Meant to prevent IRA owners from “kiting” their IRA distributions (keeping money perpetually outside the IRA by a series of rollovers), the rule traps mostly innocent bystanders. For example, Investor A inherits an IRA from her deceased spouse. She cannot roll over a distribution from that inherited IRA if within the past 12 months she received a distribution from her own IRA account that she rolled over tax-free into an IRA. She’ll have to wait to take the distribution from the inherited IRA until after the 12 months have passed. Or, more tragically, Individual B who is losing mental capacity takes distributions from his IRAs without being aware of the financial effects. A guardian is appointed for him and tries to roll the money

June 28, 2019 No Comments

Have you heard of a Roth 401(k)?

You’re probably familiar with traditional 401(k) plans, and we hope you know about Roth IRAs as well. (If not, check out these 5 things you should know about Roth IRAs). But did you know there’s also a Roth 401(k)? Basically, a Roth 401(k) is a 401(k) account to which you can contribute either pre-tax dollars, like a regular 401(k), or post-tax dollars, like a Roth IRA. All your contributions grow tax-free, but your pre-tax contributions will be taxable when you withdraw them in retirement and your post-tax contributions will be tax-free. It’s technically called a “designated Roth” account, and it’s an option your employer can add to your company 401(k) plan. The same provision for a Roth option can also be added to other kinds of qualified retirement plans, such as 403(b) or 457 plans. If you own a business and sponsor a qualified retirement plan for yourself and your employees, you may want to consider adding a Roth option. And if you’re self-employed and have no employees except your spouse, you could establish a solo 401(k) plan that allows Roth contributions. So why would you need a Roth 401(k) if you already have a Roth IRA? Here are four ways

January 8, 2019 No Comments

Rolling over your traditional 401(k) to a Roth IRA

Do you have a 401(k)? Ever wondered if you could roll over that account into a Roth IRA? You might be surprised to hear that it’s possible. You can make a direct or 60-day rollover from a 401(k) plan (or other qualified plan, 403(b) plan, or governmental 457(b) plan) to a Roth IRA, as long as you meet certain requirements.* First, you must be entitled to withdraw money from your plan. If you no longer work for the employer who sponsored that 401(k), then you would be eligible to do this rollover, and in some cases you may be able to withdraw your contributions or your employer’s contributions while you’re still working (for example, once you’ve reached age 59½). Second, your distribution must be an “eligible rollover distribution.” Distributions that cannot be rolled over include hardship withdrawals, certain periodic payments, and required minimum distributions (RMDs). Third, you must include the taxable portion of the distribution in your gross income in the year you make the rollover (“conversion”). But that’s the price you have to pay to potentially receive tax-free qualified distributions from your Roth IRA in the future. Fourth, if your distribution includes both after-tax and pre-tax dollars, you can

July 31, 2017 No Comments