Tricks and Traps of IRAs. Table of Contents

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1 Table of Contents Introduction... 1 What are the benefits of an IRA?... 2 Crunching the numbers... 2 Bankruptcy protection... 3 Starting an IRA... 7 Setting up the account... 7 What is an IRA?... 7 Types of IRAs... 7 myra accounts... 8 Funding options... 9 Employer involvement California conformity Roth versus traditional Basic considerations Roth versus traditional an in-depth look at the math Nondeductible IRAs The Saver s Credit Likely candidates Don t overlook seniors Contributing to an IRA Basic rules Due date of contributions Cash only Maximum amount Taxable compensation for purposes of the maximum contribution amount Spousal IRA Active participation at employment Defined benefit plan Defined contribution plan Tax Court case highlights active participation rules Taxpayer could have suspended benefits No IRA allowed even with minimal employer contributions No IRA deduction even when employee didn t realize he was part of a plan AGI phaseout ranges How modified AGI is computed Getting out of the plan Excess contributions Withdraw excess by due date of return i Spidell Publishing, Inc.

2 Withdraw excess after due date of return Carryover excess Planning for the penalties Specific contribution rules for each of the three types of IRAs The traditional deductible IRA The nondeductible IRA The Roth IRA Investing Smart investing in an IRA Annuities in the IRA Negatives for annuities Benefits of annuities Lifetime income stream Longevity contracts? Annuity benefits today A closer look by the government Prohibited investments and transactions Pledging the IRA Collectibles Buying a home Prohibited transactions Nontraditional investments in general advantages and disadvantages Investing in real estate How it works Hurdles Getting over the hurdles Other considerations IRA LLCs How the LLC comes into play IRA LLC structure advantages and disadvantages Summary and recommendations Rollovers for business strategies ROBS Oversight Consequences of invalid transaction Prohibited transaction cases Other ROBS noncompliance traps ROBS successes Investing in gold Wash sale rules and IRAs Spidell Publishing, Inc. ii 2016

3 Unrelated business taxable income When does tax apply? Investments that may generate UBTI Taxable income Excludable income Exceptions Tax rates Filing Paying tax Resident or nonresident? Paying investment fees Traditional IRAs Roth IRAs Rolling Over (Into and Out of an IRA) Early withdrawal penalty/additional tax IRS may question IRA-to-IRA rollovers Only one rollover is allowed per year Partial rollovers Rollover from an IRA to a qualified plan Rollover from a qualified plan to an IRA Choosing the rollover option Qualified rollovers Substantially equal periodic payments Required minimum distributions Comparison chart of allowable rollovers When not to roll over from a qualified plan Participant 55 or older Net unrealized appreciation The 60-day requirement Under what circumstances will the IRS grant relief? Applying for waiver Taxpayer granted waiver of 60-day rollover period for promissory note Taxpayer is disabled and not subject to 10% penalty No exception to early withdrawal penalty for prior-year medical expenses Gambling addict steals from his wife s IRA Converting, Recharacterizing, and Reconverting Why do it? Converting AGI limitations iii Spidell Publishing, Inc.

4 Five-year rule Income recognition Valuing an annuity for conversion purposes Partial conversions Timing Converting from other retirement plans Reporting requirements Conversions post De facto elimination of Roth contribution AGI limitations? Roth conversion checklist Recharacterizing Requirements Trustee-to-trustee transfer Transfer contribution plus allocable income Making a timely election Amended returns Reporting recharacterizations Nonautomatic extensions Letter Rulings Reconverting Planning, generally Why not? You get a mulligan! NOL opportunity Using charitable contributions AGI and passive losses Social Security taxability Medicare Medicare Parts B and D Premium Surcharge Estate planning issues Recharacterizing a high-value conversion to a Roth Distributing Spending isn t so simple General rules on distributions Traditional IRAs Nondeductible contributions Roth IRAs Transfers incident to divorce Nondeductible IRA distributions Computing the tax-free portion (basis) of the distribution Documenting the tax-free portion of the distribution Spidell Publishing, Inc. iv 2016

5 Roth IRAs The five-year rule Roth distribution ordering rules Premature distributions the 10% penalty Exception for medical purposes Exception for educational purposes Exception for first-time homebuyers Taxpayer did not qualify for first-time homebuyer 10% penalty exception Substantially equal periodic payments Payment methods No modifications allowed Exceptions to modification rules Other modifications Special tax-free distributions Distributions to fund a health savings account Qualified charitable distributions Required minimum distributions How is RMD calculated? Notes regarding the RMD calculation When must RMD begin? Penalty for failure to take RMD Distribution planning ideas Taking a deduction for IRA losses RMD in a market decline Pushing forward the RMD QLAC requirements Taking distributions early Leaving Behind And Inheriting Who gets the IRA? Beneficiary designation trumps divorce decree, but estate may sue Estate tax Treatment of an inherited IRA Taxability Roth IRAs Surviving spouse as beneficiary Beneficiary nonspouse individual Trust as IRA beneficiary Partial disclaimer of IRA proceeds does not change beneficiary s RMD IRAs Failure to take required distributions Rollovers from qualified plans v Spidell Publishing, Inc.