Individuals have access to a wide variety of vehicles for investing hard-earned (or not-so-hard earned) money. Some of these, including “individual retirement accounts” (or “IRAs”), provide potential benefits from a federal tax standpoint.
Over the next several weeks, I’ll be issuing a series of posts discussing IRAs in depth – general information, tax treatment, and some limitations and pitfalls. For now, let’s dive into a few basics.
What is an IRA?
Generally speaking, an IRA is a tax-advantaged retirement account owned by an individual, either for his or her own benefit or for the benefit of a third-party (a “beneficiary”). The Internal Revenue Code defines the term “individual retirement account” as follows:
A trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets the following requirements:
- Except in the case of a rollover contribution…no contribution will be accepted unless it is in cash, and contributions will not be accepted for the taxable year on behalf of any individual in excess of the amount in effect for such taxable year under section 219(b)(1)(A).
- The trustee is a bank…or such other person who demonstrates to the satisfaction of the Secretary that the manner in which such other person will administer the trust will be consistent with the requirements of this section.
- No part of the trust funds will be invested in life insurance contracts.
- The interest of an individual in the balance in his account is nonforfeitable.
- The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund.
Couturier v. Commissioner, No. 19714-16, T.C. Memo 2022-69 | July 6, 2022 | Lauber | Dkt. 19714-16
Short Summary: This case involves a determination by the IRS that petitioner in 2004 made an excess contribution of $25,132,892 to his individual retirement account (“IRA”). Section 4973(a) imposes an excise tax “in an amount equal to 6 percent of the amount of the excess contributions” that a taxpayer makes to an IRA in any given year. This excise tax continues to apply to future tax years, until such time as the original excess contribution is distributed to the taxpayer and included in income. See § 4973(b)(2). Petitioner contended that the IRS is precluded as a matter of law from asserting excise tax liability under section 4973 because it did not issue him a notice of deficiency challenging his income tax treatment of the transactions that generated the excess contributions. Finding no merit in this argument, the Tax Court denied the Motion.
As an American living and working abroad you better be fully armed with a knowledge regarding IRA for US expats, its’ opportunities and tax savings you can achieve. For example, do you know that depending on your foreign income you may or may not contribute to your regular or Roth IRA as an American abroad?
A lot of US expats qualify for the Foreign Earned Income Exclusion and they choose it to exclude the first $102,100 (as of the 2017 tax year) of foreign wages or self-employed income from the US federal income taxes. But not so many people know that if you are using the Foreign Earned Income Exclusion, then you signed yourself to its restrictions on your contributions to an IRA. Read further to find out more about it.
Under prior IRS rules, a rollover on day 61 was incorrect and had to be self-corrected or an expensive time consuming private letter ruling process had to be followed by the taxpayer to obtain relief from the IRS. In either case, the taxpayer was looking at extreme financial and negative emotional consequences.
Rev Proc 2016-47: Self-Certification Of Late Rollover Contribution With IRS Model Letter
Under the new Rev Proc 2016-47, instead of being required to request a private letter ruling to receive a hardship waiver for a late 60-day IRA rollover , individuals will be able to “self-certify” to their financial institution that the rollover they’re making complies with the rollover requirements, even if it doesn’t otherwise meet the 60-day rollover period. Notably, though, if the taxpayer has already requested relief from the IRS for a rollover and been denied, these new self-certification provisions cannot be used to obtain relief.
WASHINGTON —The Internal Revenue Service reminded taxpayers today that it’s not too late to contribute to an Individual Retirement Arrangement (IRA) and still claim it on a 2017 tax return. Anyone with an IRA may be eligible for a tax credit or deduction on their 2017 tax return if they make contributions by April 17, 2018.
This is the sixth in a series of nine IRS news releases called the Tax Time Guide, designed to help taxpayers navigate common tax issues. This year’s tax-filing deadline is April 17. Read More
WASHINGTON — The Internal Revenue Service today reminded taxpayers who turned age 70½ during 2017 that, in most cases, they must start receiving required minimum distributions (RMDs) from Individual Retirement Accounts (IRAs) and workplace retirement plans by Sunday, April 1, 2018.
The April 1 deadline applies to all employer-sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs, however, they do not apply to ROTH IRAs. Read More
The clock is ticking down to the tax filing deadline. The good news is that you still may be able to save on your impending 2017 tax bill by making contributions to certain retirement plans.
For example, if you qualify, you can make a deductible contribution to a traditional IRA right up until the April 17, 2018, filing date and still benefit from the resulting tax savings on your 2017 return. You also have until April 17 to make a contribution to a Roth IRA.
And if you happen to be a small business owner, you can set up and contribute to a Simplified Employee Pension (SEP) plan up until the due date for your company’s tax return, including extensions. Read More
If you have been or are anticipating converting your traditional IRA to a Roth IRA, you should be aware of a tax trap that Congress built into the Act.
Background: There are two types of IRA accounts:
- Traditional IRA – Is a retirement plan that generally provides a taxpayer with a tax deduction when a contribution is made to the account. Then when distributions are taken from the account they are fully taxable, including earnings.
- Roth IRA – Is also a retirement plan, but unlike the traditional IRA, a Roth IRA does not provide a tax deduction for the contribution. Thus, once a taxpayer reaches retirement age, all of the distributions are totally tax-free.
Every year the Taxpayer Advocate Service (TAS) helps thousands of people with tax problems. This story is only one of many examples of how TAS helps resolve taxpayer issues. All personal details are removed to protect the privacy of the taxpayer.
Every year I get this question from clients wanting to invest in real estate through their IRA or SEP IRA. While it is not as straight forward as buying stocks, mutual funds or bonds it is doable if the proper steps are followed and adhered to. First you would transfer the existing IRA to a self-directed IRA, your banks and brokerage firms will not handle these type accounts. Then form a dedicated LLC to own the properties, it will have no other business except that of the investments by the IRA.
Taxpayers who have a tax deferred retirement plan (e.g., a 401K, 403B, 457B) or an IRA must take a required minimum distribution (RMD) when they reach age 70 ½ which is reported as ordinary income. In the year you become 70 ½, you can defer the first distribution until April 15 of the following year.
You probably know that a Roth IRA can provide tax-free retirement income, but did you know the account must be “aged” before its earnings can be withdrawn tax-free? Unlike traditional IRA accounts, contributions to Roth IRAs provide no tax deduction when they are made, and unlike traditional IRAs, earnings from Roths are tax-free if a distribution is what the IRS refers to as a “qualified distribution.” A qualified distribution is one for which 1)The account has satisfied a five-year aging rule AND 2) Meets one of the following conditions:
The distribution is made after the IRA owner reaches the age of 59.5, The distribution is made after the death of the IRA owner,The distribution is made on account of the IRA owner becoming disabled, OR