Don’t Trust the IRS

We are all practically potty-trained to run everything we do by the experts.  If we are asked to sign a contract, we have to run that by our expert attorney.  If we want to understand the best business structure for tax purposes, we are told to check with our expert CPA (or another kind of attorney:  the expert tax attorney).  You get the idea:  check, check and double-check with those in the know.

In addition to our stable of highly professional professionals, we also have other highly reputable “experts” we should be able to rely on to determine if we are doing the right thing.  If we wanted to figure out what the tax implications and treatment should we want to rollover an IRA for instance, we might think the IRS would have the answers.  Let’s even say that the IRS has spelled out exactly how this IRA rollover should happen, and you diligently follow the documentation and the advice given by the IRS to the letter.  In this case, should we be able to rely on the agency that makes up the rules for the treatment of IRAs to give us sound, sage and legally accurate information?

Apparently not…

Yes, you read that right.  According to one judge, the IRS is not an “expert” in the field of IRAs and how or when to roll them over.

Huh?  Not an “expert”?  If the IRS, the rules maker, is not an expert — then just who is?

The case brought before this judge surrounds a couple and their “rights” to withdraw funds from their IRA once per year, hold these funds for 60 days, redeposit these funds into qualified accounts without incurring taxes or penalties.  The couple in this case relied on a publication produced by the IRS, Publication 590, Individual Retirement Arrangements (IRAs), as their basis for determining the legality of this action.  Simplifying the case quite a bit, here’s what we know:

The husband (a tax attorney himself) had two qualifying IRAs — one traditional, and one rollover.  He withdrew about $65,000 from each IRA within 3 months of each other.  The husband did repay these amounts within the 60 days as stipulated by the law. That’s not the real issue.  The real issue is that he took each of these distributions within 3 months of each other.

Part of the regulation regarding these distributions seems to say that you may not take a distribution like this more than once in a 12 month period.  You remember the husband took two distributions within 3 months of each other.  The court says that both of the husband’s IRAs are to be considered together when deciding if he has violated the 12 month limitation.  The husband says that the 12 month limitation applies to each IRA individually and he did not violate the 12 month limitation for each of his IRAs individually.

The judge ruled against the couple and the couple became liable for taxes and penalties.  In arguing before the court, the couple presented Publication 590.  The court used case law to back up its decision.  The couple had no case law to argue.

When I first read this story, I was outraged that the court would take such a radical stand.  After reading through the decision however, it appears that there is some ambiguity with the law, but the real problem is the IRS Publication 590.  This publication clearly outlines examples where you have two IRAs and you would like to roll these IRAs over.  The publication unequivocally states this is possible and legal.

The moral of this story?  Perhaps just as the judge said, “Taypayers rely on IRS guidance at their own peril.”  Be careful out there.

http://www.forbes.com/sites/janetnovack/2014/04/18/taxpayers-rely-on-irs-guidance-at-their-own-peril-tax-judge-rules/

An April Fool’s Joke?

$1,000.00 TOTAL in savings and investment?  I wish on this April Fool’s Day 2014, I could say this was a joke.  Unfortunately, According to the 2012 Employee Benefit Research Institute’s Retirement Confidence Survey, 30% of workers have no more than $1,000.00 total in savings and investment.  This is truly a stunning statistic.

Tragically, this is only one small statistical piece presented by this survey — there are many more disturbing statistics about Baby Boomers and Gen-Xers (like me!) and their utterly poor savings and investment habits.  Sadly, this is not just a blip on the radar, but a well-worn trend.

I’m not sure about any of you, but I really am not very interested in working any job after my mandatory retirement age of 65.  I’m also not super confident that social security will be anywhere in sight when I get there.  I’m also sure that some of you have noticed that Corporate America is not very excited to fund retirement plans for their employees (defined-benefit or DB plan) in recent years.  A report produced by the Treasury Inspector General in 2010 notes that “retirement plan participation has increased, but responsibility for funding retirement plans has shifted to the individual”.  The shift from DB plans to defined-contribution (or DC plans) has been dramatic.  In the late 1970s, fully 65.8% of workers were participating in a DB plan.  Just 20 years later, only 32.2% were participating in same.  As if this wasn’t an important enough development, people have started to live longer.

The Treasury survey also points out that there is a 47% chance that of the couples that reach age 62, one partner will attain the age of 90!  Okay, you get the idea and my train of thought.  No one is going to plan for your retirement like you will, and no one will save and invest in your retirement the way you will so that you have enough financial resources to see you through your retirement years.

There are a boat load of tools and calculators online to help you figure out just what you’ll need to retire with and how to budget for it.  Once you have determined how much money you will need, maximizing the retirement platforms at your disposal is next.  If you are a W-2 worker, it may be a DB plan.  Most likely though, you’ll have a 401(k), 403(b) or the like.  And while there is a full menu of plans that an employer can offer to their employees, as a worker, you also have options for retirement savings outside of your employer’s plans.

If you want to contribute more money toward retirement outside of your 401(k), you can open an IRA, or a Roth IRA.  If you have an entrepreneurial streak and want to start your own business, a Self-Employed 401(k) may be an option.  Each of these non-employer sponsored options need be opened at a brokerage house like Fidelity or JP Morgan, but can be opened as a custodial account.  Opening a custodial account has many great options for expanding your investment horizons and have many fewer restrictions on what you can and cannot do with your money.  Ahhh, independence!

Just because it’s April Fools doesn’t mean you have to be foolish about saving and investing for your retirement.  Figure out whether you are on track, make adjustments and meet your retirement goal.

 

To view the entire Employee Benefit Research Institute Study, visit http://www.ebri.org/pdf/briefspdf/EBRI_IB_03-2012_No369_RCS2.pdf

To view the entire Treasury Inspector General report, visit http://www.treasury.gov/tigta/auditreports/2010reports/201010097fr.pdf

Do You Contribute $69.5k a Year to Your Retirement Plan? Now You Can!

Yesterday, I had the pleasure of attending for the first time Realty411’s Masters of Real Estate Conference & Expo in San Jose, CA. There wasn’t much discussion about commercial real estate or apartment investing, but there is always something to learn, and learn I did.

Did You Know?

One of the speakers gave a talk on self-directed retirement plans.  I will blog a lot more on that topic, but if you don’t know what a self-directed IRA or 401(k) is, put it in a search engine — you won’t be disappointed.  In any event, one thing the speaker introduced me to is the Individual 401(k).  The Individual 401(k) is a program that is nothing short of stupendous, fantastic and life changing!  Honestly, what is the difference you ask?

Well, here’s the difference.  If you are a W-2 employee, you are very likely used to the employer-sponsored 401(k), or even IRA.  In the W-2 401(k) program in 2014, your contribution limit as an employee is a not so high at  $17,500, or $23,000 if you are playing catch-up — see the official language of the IRS right here:  http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics—401(k)-and-Profit-Sharing-Plan-Contribution-Limits.

The amazing part of the Individual 401(k), or the “indi (k)” as the speaker called it, is that even as a sole proprietor (not that I recommend this business structure) you will have the ability to contribute some serious dough to your retirement plan.  One of the best parts of this plan is that you need have only the intent to make money.  Huh?  That’s right, you as the owner of a business with the intent to make money, you may offer yourself a super way to contribute way more than your W-2 401(k) could ever hope to offer.

Being self-employed and offering an Individual 401(k) to yourself (and to your spouse or partners), you are entitled to not only contribute the “employee” contribution limit of $17,500, but also the “employer” contribution amount which is $52,000 (in 2014) or 25% of your compensation, whichever is less! Incredible.  And this is only if you are younger than 50.  If you are 50 years and older, the limits are even higher!  Here is the link to the IRS page that talks specifically about this program and how it should be implemented:  http://www.irs.gov/Retirement-Plans/One-Participant-401(k)-Plans.

So, by my simple calculations, here how this could work for you (age 38):

You start a business that compensates you $208,000 for all of your hard work.

You decide to contribute the maximum amount allowed by the program at $17,500 in 2014.

Your employer (you) decides that they will contribute 25% of your salary, or $208,000 X 25%, or $52,000.

That means your total retirement contribution amount equals $52,000 plus $17,500, or $69,500!  Voilà!

If you use the Individual 401(k) for yourself, please share your story.  Before hearing this yesterday, I hadn’t even considered this retirement strategy, and now I’m banking on it.

 

Hello!

Thanks for visiting and welcome!  I decided to start this blog to chronicle my exploration into investment alternatives as I continue planning and investing for retirement.  Maybe a little dull for some, but seriously important and something I hope myself and others can present in an interesting way.  Of course, suggestions are always welcome!

Over my W-2 career, the choices in investment paths has been limited, if not down right scuttled by not just my employers, but many other employers across the nation.  You might have experienced just what I’m talking about and early on, these limitations played out in how much money I was able to save and invest, and how much money was put into investments on my behalf and slated for retirement.  I knew that in order to recoup those “losses”, I would have to develop more creative ways to reach retirement in a financially whole way, i.e. get to retirement age with enough money to survive and thrive until I leave this world — hopefully many years hence!

This is a journal and a retrospective of my thought processes, my education and my experiences as I’ve tackled saving for retirement as a Gen-Xer.  I hope you’ll visit often, and I hope I’ll pass along information that you will find useful.  Enjoy!