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Dear Trust Officer:
My 80-year-old mother recently died. Does that end the need for her required minimum distributions (RMDs)from her IRA? I don’t think Mom took her full RMD for 2024, she was taking it monthly, sort of like a pension.—INTERESTED HEIR
Dear INTERESTED:
No, RMDs go on and on, until the account has been fully distributed and taxed. The full RMD for the year of death must happen, and then surviving beneficiaries will have to worry about their own RMDs.
I do have some good news to report, however. The usual deadline for the RMD is December 31 (except for the very first RMD, when the deadline is April 1 of the following year). But in IRS regulations issued this summer, the Service said that there will be a one-year grace period for the RMD due in the year of a taxpayer’s death. That RMD must happen by December 31 of the year following the taxpayer’s death.
This is an area where the stakes are very high, mistakes can be costly. Consult with your tax professionals to learn more.
Article ©2024 M.A. Co. All rights reserved. Used with permission.
Mary was in the habit of advancing funds to her children as loans, then forgiving a portion of such loans each year in the amount of the gift tax annual exclusion. However, her advancements to her oldest son, Peter, were substantially larger, in order to help him establish his architecture practice. After some initial successes, Peter suffered some financial reverses and was not able to pay the interest on his loans.
In 1995, Mary had a legal document drafted which acknowledged that Peter owed her $771,628, that he would not be able to repay it, and that this amount would be considered an advancement of his inheritance. Peter signed the document.
After Mary died in 2010, that transaction became an estate-tax issue. At first the IRS contended that the document was effectively a note whose value must be included in the estate. That issue was conceded, and the Service argued in the alternative that it was a taxable gift to be taken into consideration when calculating the estate tax.
The Tax Court agreed with the IRS that a gift occurred, but in looking at the entire record, the Court concludes that the gifts really began in 1990. That was when Peter’s financial difficulties became severe enough that Mary must have realized his loans would never be repaid [Estate of Mary P. Bolles et. al. v. Comm’r, T.C. Memo 2020-71].
In a per curiam opinion, this year the Ninth Circuit Court of Appeals affirmed the Tax Court decision. The Court also affirmed the denial of a deduction for litigation costs associated with the case, because the IRS substantially prevailed.
Article ©2024 M.A. Co. All rights reserved. Used with permission.
According to the Investment Company Institute’s 2024 Fact Book, an astounding $10.5 trillion is held in tax-qualified defined contribution plans, such as 401(k) plans. That resource will play an enormous role in the retirement security of millions of Americans over the coming years. Accumulating money in a 401(k) is one thing—arrange for salary reductions to fund the plan, evaluate investment choices for the money, check on progress periodically and make adjustments as needed.
Distribution of 401(k) money is another thing entirely—one that raises a host of new and, for most people, unfamiliar issues. Care must be taken to preserve that retirement resource, typically through a rollover to an IRA. The Fact Book reports that IRA assets have reached some $13.6 trillion. That figure includes contributions to traditional and Roth IRAs, as well as employer-sponsored programs built on IRAs, such as SEP IRAs and SIMPLE IRAs, but the bulk of the funding has come from rollovers.
Will you be receiving a lump sum distribution of some or all of your retirement benefits when you retire? A lump sum distribution, from a 401(k) plan or another qualified retirement plan provided by your employer, can be rolled over into an IRA, preserving its special tax status well into your retirement. However, you will have many important choices to make during this process. It’s not a hard or complicated process, exactly, but the consequences of your choices will last for the rest of your life, so make them carefully.
Employers provide their employees with explanations of their distribution choices, explanations that follow and IRS-approved template. The IRS-provided notices have been criticized for being overly complicated, so much so that Congress ordered the GAO to study the issue. The GAO reported in May that its survey of over 1,000 401(k) participants revealed that only 20% of them knew their four choices for a plan distribution, and 40% did not understand the tax consequences of the choices. The report is at https://www.gao.gov/assets/gao-24-107167.pdf.
On this question, one size definitely does not fit all. What are your retirement income sources? Will your income taxes be going down in retirement? Are you satisfied with the investment options in your employer’s plan? Do you have debts that should be paid off before retirement? How will you invest the money after the distribution?
Preserve the tax deferral
Most people will opt to roll their lump sums into an IRA in order to avoid current income taxation. There is a wrong way and a right way to handle this.
The wrong way is to accept a check for the amount of the lump sum. If you take this approach, your employer will be required to withhold 20% in income taxes on the distribution. You’ll either have to be satisfied with an 80% rollover, or you’ll have to come up with the difference from other savings sources.
The right way is to arrange a direct transfer from the qualified plan trustee to the trustee of your IRA rollover—there is no withholding requirement with this approach.
Planning your distributions
From age 59 1/2 through age 73 you may withdraw as much or as little from your IRA rollover each year as you please. There’s no penalty tax to worry about, but you will have to pay ordinary income tax on most withdrawals. After you reach age 73, a program of required minimum distributions (RMDs) must begin.
We can help
Retirement should be, fundamentally, the moment that you declare your financial independence, a declaration that lasts the rest of your life. Should there be an IRA rollover in this picture? If so, how will the assets be invested? We’ll be pleased to offer you our assistance with these important financial planning issues.
Article ©2024 M.A. Co. All rights reserved. Used with permission.
The IRS recently released tax guidelines for contributions and distributions from online crowdfunding (FS-20240-28, Aug. 2024). Crowdfunding is a method of raising money through websites by soliciting contributions from a large number of people. The contributions may be solicited to fund businesses, for charitable donations or for gifts. In some cases, the money raised through crowdfunding is solicited by crowdfunding organizers on behalf of other people or businesses. In other cases, people establish crowdfunding campaigns to raise money for themselves or their businesses.
In general, all the money one receives is taxable income. An important exception to this rule is that gifts are not taxable. To be a gift, contributions must be made as a result of the contributors’ detached and disinterested generosity, and without the contributors receiving or expecting to receive anything in return. The IRS notes that if there is an employer matching contribution, that amount will generally be included in the employee’s taxable compensation.
The trickier part of crowdfunding is reporting distributions to the IRS. The American Rescue Plan Act set the threshold for filing Form 1099-K at $600, but that proved to be impractical to implement on short notice. For calendar year 2023 and earlier, Form 1099-K was required if the total payments to one person exceeded $20,000 and resulted from more than 200 transactions. For calendar year 2024 the threshold is lowered to $5,000, as the stricter limits of the law are phased in. Records related to crowdfunding must be retained for three years.
The full IRS guidance may be found at https://www.irs.gov/newsroom/irs-reminds-taxpayers-of-important-tax-guidelines-involving-contributions-and-distributions-from-online-crowdfunding.
Article ©2024 M.A. Co. All rights reserved. Used with permission.
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