IRA

Potential estate tax benefit of a Roth conversion

February 1, 2011 by · Leave a Comment 

Generally the Roth conversion analysis is discussed in terms of income tax savings. However, for large estates, there is a possible estate tax benefit as well.

The reason for this comes down to the fact that the Estate tax is calculated based on nominal dollars. It treats $1 in a Roth IRA as equivalent to $1 in a Traditional IRA, even though the $1 in a Roth IRA is generally worth more than $1 in a Traditional IRA.  For example, if someone with a large estate converts $1 million in IRA assets to a Roth IRA, and pays $350K in taxes from an outside account, the value of those two scenarios may be equivalent from an income tax perspective ($1 million in a Traditional IRA + $350K in outside savings = $1 million Roth IRA). However, the estate tax savings are $350K * estate tax rate. Please note that this ignores other considerations, such as future income tax rates, the income tax bracket of the heirs, and the relavent time horizon. It is critical these other factors be considered as well.
[Update]
One other important consideration is the income in respect of descedant deduction that may be available to a beneficiary. In that case, much of the additional estate tax might be recovered in the form of income tax savings.
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Schanel & Associates, PA, Certified Public Accountants, located in Jupiter, FL, provides tax, accounting, and consulting services to clients throughout Palm Beach County, including Palm Beach Gardens, West Palm Beach and Jupiter, as well as  South Florida and the United States.

The information contained in this communication is intended as general guidance on matters of interest only. The application and impact of laws can vary widely based on specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions, or inaccuracies in information contained in this transmission. The information contained herein should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors. Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained in this communication, unless explicitly provided otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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Required Minimum Distributions and 401k’s

January 20, 2011 by · Leave a Comment 

When taking a Required Minimum Distribution, a person who has multiple IRA accounts can take the entire RMD from one IRA account.  However, if one of the qualified accounts is a 401K plan, a separate RMD must be taken from the 401K plan account. 

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Schanel & Associates, PA, Certified Public Accountants, located in Jupiter, FL, provides tax, accounting, and consulting services to clients throughout Palm Beach County, including Palm Beach Gardens, West Palm Beach and Jupiter, as well as  South Florida and the United States.

The information contained in this communication is intended as general guidance on matters of interest only. The application and impact of laws can vary widely based on specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions, or inaccuracies in information contained in this transmission. The information contained herein should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors. Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained in this communication, unless explicitly provided otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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Calculating taxable income on a Roth conversion

January 17, 2011 by · Leave a Comment 

When calculating the taxable income on a Roth conversion, the taxpayer must consider all non-Roth IRAs – Traditional IRAs, Simple IRAs, SEP IRAs – and calculate the proportion of all previously taxed (i.e. non-deductible) contributions to the total value of all IRAs at the time of the conversion.   That ratio is then applied to the Roth conversion amount.  

For example, let’s suppose a taxpayer owns the following IRAs at the time of conversion with the following characteristics:

  • Traditional IRA with a basis of zero worth $100,000 (all contributions were tax deductible contributions)
  • Traditional IRA with a basis of $20,000 worth $30,000 ($20,000 worth of contributions were considered non-deductible)
  • SEP IRA with a basis of zero worth $20,000 (all contributions were tax deductible contributions)

The taxpayer’s total IRA balance is $150,000 with a basis of $20,000.  Therefore, the proportion of previously taxed to total IRA assets is 13.33%. 

If the taxpayer converts $20,000 to a Roth IRA, he is not allowed to cherry-pick the $20,000 of after-tax contributions and assume that the Roth conversion is 100% non-taxable.  He must apply the ratio calculated above. In other words, 13.33%, or $2,666.67 would be considered previously taxed and therefore non-taxable, and the remaining balance, $17,333 would be considered taxable income.

After the conversion, the balance in all IRAs will be $130,000, with a basis of $17,333.

Also note that 401K and 403B assets are not included in this calculation. 

 

Schanel & Associates, PA, Certified Public Accountants, located in Jupiter, FL, provides tax, accounting, and consulting services to clients throughout Palm Beach County, including Palm Beach Gardens, West Palm Beach and Jupiter, as well as  South Florida and the United States.

The information contained in this communication is intended as general guidance on matters of interest only. The application and impact of laws can vary widely based on specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions, or inaccuracies in information contained in this transmission. The information contained herein should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors. Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained in this communication, unless explicitly provided otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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2011 SEP and Simple IRA Contribution Limits

January 12, 2011 by · Leave a Comment 

The maximum allowable contribution amounts to SEP and Simple IRAs has been left unchanged.

The SEP IRA 2011 Maximum Total Contribution is 49,000.  The maximum Simple IRA contribution is $11,500. and the Simple IRA catch up provision for those 50 and older is $2500.

 

Schanel & Associates, PA, Certified Public Accountants, located in Jupiter, FL, provides tax, accounting, and consulting services to clients throughout Palm Beach County, including Palm Beach Gardens, West Palm Beach and Jupiter, as well as  South Florida and the United States.

The information contained in this communication is intended as general guidance on matters of interest only. The application and impact of laws can vary widely based on specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions, or inaccuracies in information contained in this transmission. The information contained herein should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors. Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained in this communication, unless explicitly provided otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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