Taxes

Answers to Your Tax Questions on RMDs, AMTs and 401k Rollovers

Your Tax Questions Answered | www.TheHeavyPurse.comOver the last few weeks, I have hopefully helped you gain a better understanding of taxes, why you should care about them (beyond your annual tax filing!) and how you can lower your taxable income. During this time, I’ve received lots of questions about taxes, and I am going to dedicate this week to answering the most popular questions.

Start at the Beginning

Before I do, I want to highlight the series thus far, for those just joining us now. There’s a lot of great information covered in each of them.

Understanding Your Tax Reality
I shared what is the most common tax mistake, how tax brackets work, reducing taxable income and phantom income.

How To Create a Tax Efficient Portfolio through Asset Allocation
I shared what the most common tax investment mistake is, how asset allocation can help you build a tax efficient portfolio and harvesting losses.

Retirement Plans and Taxes
I outlined the differences between Qualified and Non-Qualified Retirement Plans and gave an overview of Required Minimum Distributions (RMDs).

Your Tax Questions

Unfortunately I cannot answer every question but I chose the three that seem to cause the most confusion.

Please note: This is general information that may not be relevant to your personal situation. Please work with your personal financial advisor and/or CPA to determine the best course of action for you.

If I Don’t Need the Money from My Required Minimum Distribution (RMD), Do I Have to Take It?

The simple answer is yes. RMD is REQUIRED minimum distributions, and this is how you repay the government after they allowed you to defer taxes for many years through your Qualified Retirement Plans. This is still a benefit to you because your entire dollar was able to be invested (versus minus the taxed amount in Non-Qualified Plans) and you are likely in a lower taxable income bracket now. I discussed what RMDs were last week so please read that post to understand the penalties of not taking your RMD.

If you are fortunate enough to not need the money from your RMD to pay bills and support your retirement lifestyle, I would like to offer a couple of possible strategies for to consider.

  1. First Option: A Legacy Enhancing Strategy. This strategy would be designed to use life insurance to better leverage earnings from your IRA, helping to enhance the amount your beneficiary inherits. This is done by reallocating the excess earnings from the IRA into a life insurance policy that can potentially increase the overall inheritance. Please remember, you will still pay taxes on the RMD and should consider an insurance premium that represents your after tax RMD. Don’t forget that you will need to go through underwriting, so you need to be insurable to take advantage of this strategy.
  2. Second Option: A Gifting Strategy. Consider gifting the RMD to your favorite charity, avoiding taxes all together. This strategy is approved by the IRA annually, so work with your CPA and CFP® to determine if either of these strategies make sense for you.

While it may not always seem fair that you have to take a RMD if you don’t need the money now, you do have some options that can greatly benefit those you love and/or organizations you want to support. And most importantly, remember — being in the position of having excess money is not really a problem at all. You may have to pay taxes on it, but you don’t have to spent it either.

AMT? What is It and Why Do I Have to Pay It?

This is a question I am getting more and more frequently. So let’s dig in. AMT is the Alternative Minimum Tax, and it applies more often than you think. Although it was originally designed to address the problem of wealthy individuals using various strategies to reduce or eliminate their income tax liabilities by setting a limit on those benefits, more and more middle-class Americans are finding themselves subject to AMT today.

When most of us think about paying taxes, we subtract various deductions against income, then calculate how much we owe in taxes. The AMT works differently. Using the IRS Form 6251, the AMT calculation requires you to add back certain tax deductions and income exclusions to your regular taxable income to arrive at your AMT. Your tax under AMT rules may be higher than your tax under regular tax rules, and you are required to pay the higher of the two.

What Triggers the AMT?

This is not a comprehensive list but what I most commonly see triggering AMT in my clients.

Because more people are subject to AMT, I encourage you to work your CPA to determine why you had to pay AMT and how to potentially avoid it in the future.

I Just Transferred My 401k to an IRA and Received a 1099R. Do I Need to Pay Taxes on This?

I have had many panicked calls from clients on this subject, so let’s see if I can provide some clarity around this as many of you are likely to roll-over a 401k at some point. When you move a qualified plan (IRA, 401k, etc.) to another firm, you have 60 days to invest it in another qualified plan or it becomes taxable.

The firm that you transferred out of is required to issue you a 1099R for tax purposes. The firm that you “rolled over” the plan to will also issue one to the IRS stating that you have moved the money back into a qualified plan with the date attached. It is your responsibility, whether you are doing it yourself or through your financial advisor, to confirm the money has rolled over within the appropriate timeframe. Otherwise, you may be subject to taxes and penalties (if under 59 1/2). So, assuming the roll-over happened within the approved timeframe, you do not owe taxes.

Don’t Be Afraid to Seek Help

Tax code frequently changes and can be very confusing to most taxpayers. Thanks to the internet we can find lots of great information, but be sure that you’re also not following old rules either. 🙂 Don’t be afraid to seek professional help, especially if your tax situation is complicated. There are no dumb questions and a professional can make a real difference to both your tax knowledge and your tax liability.

Shannon

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March 9, 2015  •  16 Comments  •  Taxes

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Comments

  1. Monday, March 9th, 2015
    Great point about the 1099R. I know I would be panicking in that situation as well! Taxes are so complicated these days it's hard to know if you are doing the right or wrong thing. I'm thankful that we live in a world of advanced software that makes taxes (among other things) much easier.
    • Shannon Ryan
      Thursday, March 12th, 2015
      Taxes are complicated and it's unlikely they will become simpler. I agree, there are lots of software and professionals who can help make sense of it all. :)
  2. Monday, March 9th, 2015
    Excellent post Shannon. I spoke to individuals all the time who were dealing with the RMD or 1099R issue and the 1099 one was usually the easier one to handle. :) That said, this is exactly why we went with a CPA to prepare our taxes for us. The last thing we want is to get wonked by taxes and love being able to have an expert do them for us.
    • Shannon Ryan
      Thursday, March 12th, 2015
      My CPA is an invaluable partner too. While I believe that I have a very strong understanding of taxes, I want another set of professional eyes looking over them and identifying any opportunities that I missed.
  3. Monday, March 9th, 2015
    I love that you have offered your advice on these topics. RMDs and AMT were two areas that I had many conversations with clients around. As with most tax issues, not knowing your situation could have serious negative implications for your finances, so it's better to ask and get clarification before you file your taxes.
    • Shannon Ryan
      Thursday, March 12th, 2015
      Thanks, Shannon. RMDs and AMTs definitely confuse many and unfortunately I've seen some unfortunate mistakes as I'm sure you have as well. There are definitely no bad questions when it comes to taxes and it's much easier to get clarification now, rather than after you filed your taxes.
  4. Monday, March 9th, 2015
    More great information. In reality, I have not paid much attention to AMT's or RMD's because I've never had to deal with either, but I would never trust myself to figure it out on my own. A business owner told me a long time ago to get a good CPA and a good attorney. I've only needed the attorney a couple of times, but I use the CPA all the time!
    • Shannon Ryan
      Thursday, March 12th, 2015
      I have a valued CPA and attorney too and it's nice having them in my corner. :) You definitely have some time before RMDs affect you, but AMTs are definitely affecting more and more people these days. It often surprises them because they assumed only the super rich were affected.
  5. Tuesday, March 10th, 2015
    The part about transferring from 401K to IRA is a great one. I've already done this once, though I didn't really know anything about the process and now I'm going to have to do it again whenever I get ready to leave my current FT job. Thanks for sharing Shannon!
    • Shannon Ryan
      Thursday, March 12th, 2015
      You're welcome, Kayla. Lots of people will deal with 401k rollovers and they get confused about the taxes, which can led to a lot of mistakes. So I'm glad I could help and I'm thrilled that your freelancing is going so well for you!
  6. Wednesday, March 11th, 2015
    This really has been a great series Shannon! It seems like everyday my wife comes home and says they've changed something about the tax code. Really makes it frustrating when people are trying to do the right thing - and meet deadlines - and the game keeps changing in the middle of it.
    • Shannon Ryan
      Thursday, March 12th, 2015
      Thanks, Brian! It can't even imagine all the changes Kim has to keep up with. It is frustrating because one you think you have a handle on something, they change it.
  7. Wednesday, March 11th, 2015
    I like the idea of gifting the RMD to a charity if you don't need it. What a great way to boost your "giving back" obligations without truly hurting your own lifestyle.
    • Shannon Ryan
      Thursday, March 12th, 2015
      Absolutely, Laurie. If you don't need the money yourself, giving to organizations or people you love is a great use for the money.
  8. Thursday, March 12th, 2015
    Love you post Shannon on taxes. Every basic information and question I believe is covered. That being said, my question is I don’t have kids or a mortgage. Are there any other big tax breaks I can take advantage of?
    • Shannon Ryan
      Thursday, March 12th, 2015
      Thanks, Jayson! I don't know your personal situation to give you specific advice, but I would make sure that you are taking advantage of all the various tax credits available (your CPA and/or tax software should help uncover which ones you qualify for) and any other opportunities you have.
Shannon Ryan SHANNON RYAN, CFP®
  • Meet Shannon

    "As a Certified Financial Planner, it is my passion to help individuals and families build a healthy relationship with money. I look forward to helping you raise financially confident kids.” - Shannon Ryan
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