Jack Kiley CPA, CISP

2012 IRA Contribution Limits

IRA Contribution limit remains at $ 5,000 for 2012

Recently the Internal Revenue Service announced the 2012 contribution and cost of living increases regarding IRAs and 401k plans.  The following can be found on the IRS’s website at www.irs.gov.

If you are under 50 years of age at the end of 2012:
The maximum contribution that you can make to a traditional or Roth IRA is the smaller of $5,000 or the amount of your taxable compensation for 2012.  This limit can be split between a traditional and a Roth IRA but the combined limit is $5,000.  The maximum contribution to a Roth IRA and the maximum deductible contribution to a traditional IRA may be reduced depending upon your modified adjusted gross income (modified AGI).

If you are 50 years of age or older before the end of 2012: 
The maximum contribution that can be made to a traditional or Roth IRA is the smaller of $6,000 or the amount of your taxable compensation for 2012.  This limit can be split between a traditional and a Roth IRA but the combined limit is $6,000.  The maximum contribution to a Roth IRA and the maximum deductible contribution to a traditional IRA may be reduced depending upon your modified AGI.

The AGI phase-out range for taxpayers making contributions to a Roth IRA is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2011.  For singles and heads of household, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000.  For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000.

The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $58,000 and $68,000, up from $56,000 and $66,000 in 2011.

For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000.  For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $173,000 to $183,000, up from $169,000 and $179,000.

The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal governments Thrift Savings Plan is increased from $16,500 to $17,000.

For more information, please refer to IRS publication 590 or contact us.

MidAtlantic IRA, LLC
800.607.0145 x260
scott.blair@midatlanticira.com

DISCLAIMER: MidAtlantic IRA, LLC. does not render tax, legal, accounting, investment, or other professional advice. If tax, legal, accounting, investment, or other similar expert assistance is required, the services of a competent professional should be sought.

jack.kiley@midatlanticira.com
800/607-0145 x201

I’ve recently spent two days at an industry conference where the main topic was detecting fraudulent IRA investments. Significant emphasis was placed on the various government agencies, (SEC, FINRA, FBI, et al.) that are concerned about this very issue; especially in this bad economic environment.

As the owner or potential owner of a self directed IRA, the onus is on you and your advisors to determine whether an investment is right for you. Although, lessons from the past several years should have taught you that ultimately it is your responsibility to determine if the investment is right for your portfolio.

The following are some simple steps you can take to begin assessing your potential investment.

Caveat emptor.

Look at the promoter – be sure he is who he says he is.
(This is not about his reputation, do you know anyone who had a great reputation but is now a ward of the penal system?)

Look at the deal

Is the investment registered with the Securities and Exchange Commission, (SEC)? If the investment is being advertised to the general public, it must be registered. You should have received a bevy of paperwork regarding the investment; (i.e. prospectus, financial statements, 10K, 10Q, offering circular, etc.).

Starting here will save you a lot of time. Many scams are perpetrated by people with questionable backgrounds and when discovered, the warning signs seemed very apparent. If you begin your due diligence with these 10 steps, you may end up saving yourself a lot a pain and money later.

jack.kiley@midatlanticira.com
800/607-0145 x201

With tax rates almost certain to rise, and families feeling squeezed, an old idea is getting a second look. Many people are reviewing their IRA beneficiaries as part of their estate plans. As baby boomers begin to retire and rollover their retirement plans into IRAs, it is not unusual to have more than $500,000 accumulated in these accounts. If one of your estate planning objectives is to leave something to your children, there may be a planning opportunity with respect to your IRA. Many financial planners refer to this as a legacy or stretch IRA. By naming your children, instead of your spouse, as the beneficiary(s) of your IRA, you could be leaving a fortune to your children (as well as a great retirement!). Here’s how it works.

First, name your child (or grandchild) as the beneficiary of your IRA. This should be done on a beneficiary designation form provided by the custodian of your IRA. If your Will names one person and the beneficiary designation form with the custodian lists someone else (possibly an ex spouse), the beneficiary designation will control. Additionally, if you are married, be sure that your spouse is aware that you named someone else as beneficiary and has consented to it. In some states, you cannot ‘jump over’ your spouse without written consent.

Next, be sure that the custodian of your IRA will allow your IRA to be inherited and distributed over the life expectancy of the beneficiary. Many custodians do not allow this. IRAs at MidAtlantic IRA, LLC will allow this.

At your demise, your beneficiary inherits your IRA and will take required minimum distributions annually, based on his life expectancy (not yours). These would be taxable to him but not subject to the 10% premature distribution penalty. If your beneficiary takes the total amount in the IRA in cash, this will be a distribution, taxable to them.

Let’s look at an example:

An IRA valued at $200,000 when transferred to a beneficiary 20 years old, assuming a 8% average return, would distribute $1,342,607 over the next 45 years and grow to be worth $2,179,345 (at age 65) after the distributions. Not only will this provide a steady income stream to your beneficiary; but it could provide a retirement worth ten times more than the amount of money you initially leave.

This strategy could be supercharged by converting your IRA to a Roth IRA! (a subject of a future article)

This strategy can be a powerful planning tool and should be considered as part of your overall estate plan and discussed with your financial advisors.

Jack Kiley, CPA, PFS, CISP Partner, MidAtlantic IRA, LLC and John Kiley CPA, LLC

jack.kiley@midatlanticira.com
Roth-Recharactorization.pdf

I’ve been a CPA for over twenty years. Recharacterizing a Roth is one of only a few instances that I can think of where the IRS allows you to make a decision (convert from Traditional IRA to a Roth IRA), wait what could be well over a year to see how your newly converted Roth IRA performs, and if you don’t like your decision, change it back (recharacterize). As an Administrator of Self Directed IRAs, we had a number of clients who rushed to take advantage of the special rules regarding Roth conversions completed in 2010.
To review, beginning in 2010, the $100k income limitation for conversions was permanently eliminated. This enables taxpayers (whether married or single) to convert traditional IRAs to Roth IRAs without worrying about whether they will qualify by staying under the now eliminated income limitation. As an added incentive, for conversions completed in 2010 only, taxpayers are able to make an election to defer the tax on these conversions and pay tax on half of the converted amount in 2011 and the other half in tax year 2012. Many taxpayers enter into complicated transactions like this not fully understanding all the ramifications and then suffer a form of ‘buyer’s remorse.”
Fortunately, with Roth Conversions, there is an opportunity to ‘undo’ the transaction. Simply stated, there is an opportunity to evaluate the tax treatment of your account AND THEN, decide whether you really wanted to convert to Roth or not.

Let’s look at an example.
Suppose you had an IRA account here at MidAtlantic IRA with a value at the time of conversion of $150k (this is the amount you’ll pay tax on). Further, let’s say that you purchase a property for $90k and put $40k of additional improvements into the property. When the improvements are complete, you put the property on the market for $225k.

If the property sells in a reasonable amount of time for $225k, your decision to convert your IRA was a good one. The only question that remains is whether you want to pay the tax on the $150k (the amount converted) in 2010 or defer the tax and pay half in 2011 and the other half in 2012.

If on the other hand, let’s say you put the property on the market for $225k and it doesn’t sell. In fact, let’s say the likelihood is low that you’ll be able to recoup your investment. What can you do? Simple, you recharactorize your Roth back to a Traditional IRA. This is one of only a few instances in tax law where hind sight can be 20/20. When you recharacterize, you will not pay tax on the conversion. The account is returned to its pre Roth status. Better still, you have until October 15, 2011 to recharactorize your 2010 conversion.

In the self directed IRA world, this can be a real planning tool. We have many clients who, thinking that they have found an extremely good piece of property, convert first and then purchase the property. The challenge becomes, with illiquid assets, does the transaction turn out to be as profitable as was originally thought. If it was, the client is happy to pay the tax on the conversion knowing that his account is worth quite a bit more and the income never will be taxed. If the deal turned out not to be a good one, then the client can recharactorize and not pay any tax.

The rules on conversions and recharactorizations are complex and confusing. We encourage you to contact us or your tax advisor to help explain the rules regarding these transactions. Happy investing!!

Jack Kiley, CPA, PFS, CISP Partner, MidAtlantic IRA, LLC and John Kiley CPA, LLC
Jack Kiley brings to the table over 25 years of experience in public accounting. He has extensive knowledge in developing tax, retirement and financial planning strategies for high net worth individuals along with closely held businesses and has a reputation for “speaking in plain English” regarding complex concepts. Groups regularly engage him to speak about these topics especially “How to Self-Direct Your IRA.” His specialty knowledge makes him the expert to turn to particularly when a complex scenario is needed for the purchase of real estate, mortgages, leases and other cash flows that the IRS allows in an individual retirement plan. Jack Kiley a Certified Public Accountant (CPA) is also credentialed as a Personal Financial Specialist (PFS) and a Certified IRA Services Professional (CISP).

jack.kiley@midatlanticira.com
Annual-contribution-limits-2011.pdf

As 2010 is comes to a close, we all begin to look ahead to 2011. For retirement plans, the landscape in 2011 will look much like 2010. The new contribution limits largely remain unchanged. In calculating these, IRS compares the official cost of living increase from September of 2010 to September of 2009. Because, at least officially, the cost of living was higher in 2009 than in 2010, all indexed (for inflation) contributions, limitations, thresholds, etc in the IRS will remain at 2010 levels.

Below is a table of 2010 and 2011 contribution limits:

In reviewing these limits, some definitions and rules need to be kept in mind.

With Traditional IRAs, contributions can only be made to the extent you have earned income up to the maximum allowed in the table above. Earned income is defined as W-2 income or earning subject to self employment. There are other qualifiers which we will not discuss here. (examples: if you have W-2 wages of $50,000 you may contribute $5,000. If you have W-2 wages of $3,000, you may only contribute $3,000). Also, you may not contribute after you reach the age of 70 ½.

Please keep in mind these are contribution limits-not deductible amounts. It is possible to make a nondeductible Traditional IRA contribution which will be discussed in a future article.

Roth IRAs follow similar rules with one big exception. For married couples, if your Adjusted Gross Income is greater than $169,000 then your contribution will be limited and once your AGI rises above $179,000 you be precluded from contributing to a Roth (For singles the contribution phase out begins at $107,000 and the contribution is fully eliminated at $122,000).

With both Traditional and Roth IRAs taxpayers older and 50 ½ may contribute an additional $1,000.

The minimum SEP (Self Employed Pension) coverage begins for employees earning at least $550. What this means is that Employers who maintain a SEP plan must contribute for employees earning more than $550 per the plan calculation.

An elective deferral is the amount of earnings an employee ‘elects’ to contribute to their respective plan maintained by the employer. The elective limits remain unchanged for both SIMPLE Plans ($11,500) and for 401k, 403b, and Government plans ($16,500).

Catch up contributions for SIMPLE Plans ($2,500) and other Qualified Plans ($5,500), again remain at their 2010 levels for 2011.
This is a brief overview of the contribution limits to the plans that the majority of Americans maintain. For questions regarding your particular plan, you should contact your plan administrator or feel free to contact us at 800/607.0145 x201.

Jack Kiley, CPA, PFS, CISP Partner, MidAtlantic IRA, LLC and John Kiley CPA, LLC

Jack Kiley brings to the table over 25 years of experience in public accounting. He has extensive knowledge in developing tax, retirement and financial planning strategies for high net worth individuals along with closely held businesses and has a reputation for “speaking in plain English” regarding complex concepts. Groups regularly engage him to speak about these topics especially “How to Self-Direct Your IRA.” His specialty knowledge makes him the expert to turn to particularly when a complex scenario is needed for the purchase of real estate, mortgages, leases and other cash flows that the IRS allows in an individual retirement plan. Jack Kiley a Certified Public Accountant (CPA) is also credentialed as a Personal Financial Specialist (PFS) and a Certified IRA Services Professional (CISP).

A traditional IRA is any IRA that is not a Roth IRA or a SIMPLE IRA.

Who Can Set Up a Traditional IRA?

You can set up and make contributions to a traditional IRA if:

You can have a traditional IRA whether or not you are covered by any other retirement plan. However, you may not be able to deduct all of your contributions if you or your spouse is covered by an employer retirement plan. See How Much Can You Deduct , later.

A Roth IRA is an account or annuity set up in the United States solely for the benefit of you or your beneficiaries. It is an individual retirement arrangement. However, it differs from traditional IRAs in that contributions are not deductible. For information on contributions and the limitations please refer to Chapter 2 of the Publication 590, Individual Retirement Arrangements.

To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is set up. A deemed IRA can be a Roth IRA, but neither a SEP IRA nor a SIMPLE IRA can be designated as a Roth IRA.

Unlike a traditional IRA, you cannot deduct contributions to a Roth IRA. But, if you satisfy the requirements, qualified distributions (discussed later) are tax free. Contributions can be made to your Roth IRA after you reach age 70½ and you can leave amounts in your Roth IRA as long as you live.

What’s New for 2010

Modified AGI limit for Roth IRA contributions increased. For 2010, your Roth IRA contribution limit is reduced (phased out) in the following situations.

See Can You Contribute to a Roth IRA? in this chapter.

Conversions to Roth IRAs.

Beginning in 2010, the modified AGI and filing status requirements for converting a traditional IRA to a Roth IRA are eliminated.Also, for any 2010 rollover from an IRA other than a Roth IRA to a Roth IRA, any amounts that would be included as income will be included in income in equal amounts in 2011 and 2012. You can choose to include the entire amount in income in 2010.

Catch-up contributions in certain employer bankruptcies.

The provision for additional catch-up contributions in certain employer bankruptcies does not apply for 2010 or later years.

Qualified charitable distributions (QCDs).

The provision for tax-free distributions from IRAs for charitable purposes is scheduled to expire and will not be available for 2010.

A SIMPLE IRA plan is a Savings Incentive Match PLan for Employees. Because this is a simplified plan, the administrative costs should be lower than for other, more complex plans. Under a SIMPLE IRA plan, employees and employers make contributions to traditional Individual Retirement Arrangements (IRAs) set up for employees (including self-employed individuals), subject to certain limits. It is ideally suited as a start-up retirement savings plan for small employers who do not currently sponsor a retirement plan.

Advantages:

• Easy to set up and run – usually just a phone call to a financial institution gets things started.
• Administrative costs are low.
• Employees can contribute, on a tax-deferred basis, through convenient payroll deductions.
• You can choose either to match the employee contributions of those who decide to participate or to contribute a fixed percentage of all eligible employees’ pay.

Under a SIMPLE IRA plan, you, the employer, make contributions to traditional IRAs (SIMPLE IRAs) set up for each of your eligible employees. In addition, this type of plan allows your employees to defer a part of their salaries into the plan for retirement. A SIMPLE IRA Plan is funded both by employer and employee contributions. Each employee is always 100% vested in (or, has ownership of) all money in his or her SIMPLE IRA.

How does a SIMPLE IRA plan work?

Example 1:

Elizabeth works for the Rockland Quarry Company, a small business with 50 employees. Rockland has decided to establish a SIMPLE IRA plan for its employees and will match its employees’ contributions dollar-for-dollar up to 3% of each employee’s salary. Under this option, if a Rockland employee does not contribute to his or her SIMPLE IRA, then that employee does not receive any matching employer contribution from Rockland.

Elizabeth has a yearly salary of $50,000 and decides to contribute 5% of her salary to her SIMPLE IRA. Elizabeth’s yearly contribution is $2,500 (5% of $50,000). The Rockland matching contribution is $1,500 (3% of $50,000). Therefore, the total contribution to Elizabeth’s SIMPLE IRA that year is $4,000 (her $2,500 contribution plus the $1,500 contribution from Rockland). The financial institution partnering with Rockland on the SIMPLE IRA plan has several investment choices and Elizabeth is free to pick and choose which ones suit her best.

Example 2:

Austin works for the Skidmore Tire Company, a small business with 75 employees. Skidmore has decided to establish a SIMPLE IRA plan for all its employees and will make a 2% nonelective contribution for each of its employees. Under this option, even if a Skidmore employee does not contribute to his or her SIMPLE IRA, that employee would still receive an employer contribution to his or her SIMPLE IRA equal to 2% of salary.

Austin has a yearly salary of $40,000 and has decided that this year, he simply cannot make a contribution to his SIMPLE IRA. Even though Austin does not make a contribution this year, Skidmore must make a contribution of $800 (2% of $40,000). The financial institution partnering with Skidmore on the SIMPLE IRA plan has several investment choices and Austin has the same investment options as the other plan participants.

A SEP is a simplified employee pension plan. A SEP plan provides employers with a simplified method to make contributions toward their employees’ retirement and, if self-employed, their own retirement. Contributions are made directly to an Individual Retirement Account or Annuity (IRA) set up for each employee (a SEP-IRA). See Publication 560 for detailed SEP information for employers and employees.

Note: The IRS has a system of correction programs for sponsors of retirement plans, including SEPs, which are intended to satisfy Internal Revenue Code requirements but have not met the requirements for a period of time. This system, the Employee Plans Compliance Resolution System (EPCRS), permits employers to correct plan failures and thereby continue to provide their employees with retirement benefits on a tax-favored basis.

How is a SEP established?

A SEP is established by adopting a SEP agreement and having eligible employees establish SEP-IRAs. There are three basic steps in setting up a SEP, all of which must be satisfied.

• A formal written agreement must be executed. This written agreement may be satisfied by adopting an Internal Revenue Service (IRS) model SEP using Form 5305-SEP, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement. A prototype SEP that was approved by the IRS may also be used. Approved prototype SEPs are offered by banks, insurance companies, and other qualified financial institutions. Finally, an individually designed SEP may be adopted.

   

• Each eligible employee must be given certain information about the SEP. If the SEP was established using the Form 5305-SEP, the information must include a copy of the Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. If a prototype SEP or individually designed SEP was used, similar information must be provided.

   

• A SEP-IRA must be set up for each eligible employee. SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. The SEP-IRA is owned and controlled by the employee and the employer sends the SEP contributions to the financial institution where the SEP-IRA is maintained.

IRS TAX TIP 2008-59

A Coverdell Education Savings Account (ESA) is an account created as an incentive to help parents and students save for education expenses.

The total contributions for the beneficiary of this account cannot be more than $2,000 in any year, no matter how many accounts have been established. A beneficiary is someone who is under age 18 or is a special needs beneficiary.

Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses.

Here are some things to remember about Distributions from Coverdell Accounts:

• Distributions are tax-free as long as they are used for qualified education expenses, such as tuition and fees, required books, supplies and equipment and qualified expenses for room and board.
• There is no tax on distributions if they are for enrollment or attendance at an eligible educational institution. This includes any public, private or religious school that provides elementary or secondary education as determined under state law. Eligible institutions also include any college, university, vocational school or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. Virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions are eligible.
• The Hope and lifetime learning credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits.
• If the distribution exceeds qualified education expenses, a portion will be taxable to the beneficiary and will usually be subject to an additional 10% tax. Exceptions to the additional 10% tax include the death or disability of the beneficiary or if the beneficiary receives a qualified scholarship.

There are contribution limits for taxpayers based on the contributor’s Modified Adjusted Gross Income. Contributions to a Coverdell ESA may be made until the due date of the contributor’s return, without extensions.

If there is a balance in the Coverdell ESA when the beneficiary reaches age 30, it must generally be distributed within 30 days. The portion representing earnings on the account will be taxable and subject to the additional 10% tax. The beneficiary may avoid these taxes by rolling over the full balance to another Coverdell ESA for another family member. For more details, see IRS Publication 970, Tax Benefits for Higher Education (at IRS.gov) or call 800-TAX-FORM begin_of_the_skype_highlighting 800-TAX-FORM end_of_the_skype_highlighting (800-829-3676).

Remember that for the genuine IRS Web site be sure to use .gov. Don’t be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is www.irs.gov.

Links:

• Publication 970, Tax Benefits for Higher Education (PDF 368K)
• Tax Topic 310 — Coverdell Education Savings Accounts
• IRS Tax Tip 2007-48 — Offset Education Costs