The Wall Street Journal
Family Value – June 23, 2012
IRA Rules Get Trickier
Uncle Sam Is Cracking Down On Common Retirement-Account Errors
Here’s How To Protect Yourself
By Kelly Greene
Uncle Sam is about to get a lot tougher on individual retirement account mistakes—and that could trip up investors who aren’t careful.
Some 46 million U.S. households, or two out of five, hold a combined $4.9 trillion in IRA assets, according to the Investment Company Institute. The more-aggressive enforcement means those investors need to make sure their accounts are in order—quickly.
Failing to Withdraw
People in their 70s have to start taking money out of IRAs and pay the federal government its due. But the rules get complicated quickly.
IRA owners must start taking their required withdrawals from traditional IRAs by April 1 of the year after they turn 70½. Those withdrawals are calculated by dividing the total IRA balance as of Dec. 31 of the year before the owner turns 70½ by life expectancy, found in a table in IRS Publication 590.
Contributing Too Much
Generally, an excess contribution to a traditional IRA is any amount more than $5,000 a year, or $6,000 if you are 50 or older. But you can’t contribute more than your “earned income,” which trips up some people who manage their own property and investments, accountants say.
Inheriting an Account
When you inherit an IRA, the rules for making withdrawals are different from those governing regular IRAs, and even some financial professionals don’t know them.
Comments June 23, 2012
One important exception to the $5,000 per person or $6,000 per person (for those 50 years of age or older) IRA contribution rule exists for spouses: if you and your spouse are 50 years of age or older and you do not earn “earned income”, but your spouse does, you can still contribute to an IRA.
For example, if only your spouse had a part-time job that generated $14,000 per year, each of you could contribute $6,000 to either a Traditional IRA or a Roth IRA. This is a great way for retirees to grow or retain their retirement nest egg.
Assuming contribution limits do not increase in the future, that same 50 year old couple could contribute $12,000 per year to IRAs through age 75 (or any age, since there no age limits on Roth IRAs). Based on an 8% annual return the IRAs would grow to $877,271 – providing a nice supplement to their other retirement savings. Without using the exception referenced above the IRA savings would be half this size.
Aaron Skloff, AIF, CFA, MBA
CEO – Skloff Financial Group
Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA), is the Chief Executive Officer of Skloff Financial Group, a Registered Investment Advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies. He can be contacted at www.skloff.com or 908-464-3060.