Author: Dan Moisand

Outside the Box: I took advantage of the 2020 RMD rule but now my 1099-R looks wrong — what should I do?

This post was originally published on this site

Q: I took advantage of the 2020 RMD rule and returned what I had taken from my IRA thinking there would be no taxes. I just got a 1099-R showing the full RMD. That can’t be right. How do I correct it?

—Pauline

A.: Pauline,

If the 1099-R is incorrect, you will need to contact the firm that issued the statement to get it corrected. However, the 1099-R is probably correct.

Read: Are there new RMD rules this year?

Under the law, the firm issuing the 1099-R has no responsibility for reporting how much of a distribution is taxable. That responsibility rests on your shoulders as a taxpayer. The issuing firm need only report what was paid out of the IRA on 1099-R.

Not sure where to retire? Let us help you find the right spot

That does not mean you will pay any tax. Any funds returned to the IRA by Aug. 31, 2020 is considered a rollover and is not taxable. Normally, Required Minimum Distributions (RMD) are not eligible for rollover, but IRS guidance after enactment of the CARES Act that waived RMD for 2020 changed that. The guidance stated the normal 60-day time limit for rollovers would not apply and instead instituted a fixed deadline of Aug. 31, 2020 to return such distributions and avoid taxation.

Read: It’s not too late to save on your 2020 tax bill — here’s how

I get similar questions about 1099-Rs every year. The reporting of the gross distribution looks like an error but in most cases, it is correct and the person receiving it simply hasn’t learned how it is accounted for yet.

Here’s how the accounting typically works.

As with any gross amount reported on Form 1099-R, you declare the amount that is not taxable when you file your 2020 tax return. What I hear most tax preparers would do in your situation is put the gross distribution amount from 1099-R on line 4a as per the normal procedure. Then, they would place a zero in 4b of your Form 1040, and put a note on the return near those lines that it was “returned to the IRA under the CARES Act,” “CARES Act rollover,” “CARES Act,” or simply “Rollover.”

Read: These are the best new ideas in retirement

If you did not return all of distribution by the deadline, the portion that was not returned would be taxable. You would put that number on line 4b.

Read: 5 things to do if you inherit a Roth IRA

As I mentioned a moment ago, the discrepancy between the gross distribution reported and what should actually be taxable comes up in other situations. Three of the most common are other rollovers, Qualified Charitable Distributions (QCD), and distributions from accounts that had received after-tax contributions.

In all those cases, the reporting process looks like what I described above. You put the gross distribution on line 4a and the taxable portion on Line 4b. Then note why the numbers are different with “rollover,” “QCD,” or “See Form 8606” on the 1040. Form 8606 is the form used to determine the taxable amount of an IRA distribution when nondeductible contributions have been made to any of one’s IRA accounts.

If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line.

Dan Moisand’s comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.

Retirement Weekly: How much income do you need to contribute to an IRA?

This post was originally published on this site

Q.: I read that you need $6,000 of income to make an IRA contribution. Is that per person? My wife did not work in 2020.

—Mark in San Diego

A.: Mark, each person is limited to a maximum contribution of 100% of earned income or $6,000 ($7,000 if age 50 or more). The contribution can go into an IRA, a Roth IRA, or a combination of the two as long as the total contributed does not exceed the limit.

Read: $100,000 in retirement savings for low-wage workers? It’s possible

The contribution limit is independent of any other retirement plans you or your wife may be covered by like a 401(k). Those other retirement plans affect your ability to deduct your contribution for tax purposes but do not affect your ability to contribute. Anyone with enough earned income can contribute to an IRA. It may not be a deductible contribution, but a contribution can be made.

For married couples, this means up to $6,000 (or $7,000 depending on age), can be contributed for each spouse for a maximum total of $12,000-$14,000. The earned income does not have to be earned by any particular member of the couple if filing a joint return. If either spouse earns the needed $12,000-$14,000, or the combined earned income of both spouses totals $12,000-$14,000, both spouses can make their $6,000 ($7,000) contribution.

Read: A solution to the retirement crisis already exists — on paper at least

For purposes of eligibility for IRA/Roth IRA contributions earned Income is traditionally from work so it includes salaries, wages, tips, bonuses, commissions, and net positive income from self-employment. It also includes taxable alimony received. Less common but also eligible is difficulty-of-care payments for foster care workers and taxable non-tuition fellowship and stipend payments.

That leaves a lot of other income sources that does NOT qualify. For instance, items you find on a 1099-INT, 1099-DIV like interest income and dividends on stocks or other investments do not qualify. Rental income and capital gains from the sale of investments or property does not count. Nor do pension payments, profit sharing, IRA distributions, or distributions from retirement accounts or annuities.

Social Security, deferred compensation, unemployment compensation, child support, disability insurance income and life insurance proceeds are also excluded.

If you contribute more than you are allowed to contribute, an “excess contribution” has occurred and it will need to be corrected.

For a 2020 contribution, no penalty will apply if it is corrected by April 15, 2021. The penalty for leaving an excess contribution in an IRA or Roth IRA is 6% of the excess for every year the excess remains in the account. That can add up. To correct an excess for earlier years, you file Form 5329 which will place information on Schedule 2 on your 1040. The exact fix can vary quite a bit based on timing, amount, age, and whether you apply the excess to a later year contribution. The firm holding the account and your advisor should be able to help you get the correct amount removed.

If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line.

Dan Moisand is a financial planner with Moisand Fitzgerald Tamayo. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.

Outside the Box: I want to open an IRA — should I choose a traditional IRA or a Roth?

This post was originally published on this site

Q: I am 34. My wife is 33. We finally have some extra money for savings and want to put money in an IRA. I understand we can make contributions for 2020 in 2021. Is that right and which is better a Roth or regular IRA?

— Sam

A.: Sam,

You have until the tax filing deadline to make IRA contributions for tax year 2020. At your ages, you can each contribute up to $6,000 to a traditional IRA, a Roth IRA, or any combination of the two you choose. Both spouses do not need to work but the working spouse will need earned income of at least $12,000 for you to fully fund the two IRAs.

Tax & Retirement Tips

Whether a traditional IRA or a Roth IRA is a better choice depends on a number of factors.

The dominant factor for most people is tax rates. The essence of the tax strategy is to pay taxes when you are in lower tax brackets and avoid taxes when in higher brackets. I will use 2020 numbers for joint filers in this column. 2021 numbers are slightly higher for most items mentioned.

If you are in a low tax bracket now and anticipate you would be in a higher tax bracket when you would take distributions, a Roth IRA is an excellent choice, if you qualify. You would fund the Roth IRA with after-tax dollars and eventually take the money out tax-free when you were in that higher tax bracket.

On the other hand, if you are in a high bracket now and anticipate you would be in a lower bracket later, say in retirement, a deductible contribution to a traditional IRA is a good choice, if you qualify.

The tax rate that will apply to you for 2020 is determined with certainty when you prepare your tax return. The tricky part can be guessing what rate will apply in the future. It is not a matter of tax rates generally going higher. It is a matter of what rate will apply to you in the year you withdraw funds and whether that rate will be higher or lower than the current rate. Sometimes there is a clear answer, sometimes not.

Once you establish a preference based on your view of you current and future tax rates, you look to see if you qualify to make the contribution you desire.

Qualification to make a deductible contribution to a traditional IRA depends on income and whether you or a spouse are covered by a qualified plan like a 401(k). If neither you nor your spouse is covered under a plan, you can both can make deductible contributions to a traditional IRA as high as $6,000 each.

If you are covered and your joint Modified Adjusted Gross Income (MAGI) exceeds $124,000, your contribution is not deductible. A MAGI under $104,000 means a full deduction is available. In between $104,000 and $124,000 a deductible contribution of less than $6,000 is allowed.

The same restriction applies to your wife if she is covered by a plan. One the other hand, if only one of you is covered, the non-covered spouse cannot deduct their contribution if your joint MAGI is $206,000 or more, a full deduction is allowed if MAGI Is below $196,000, and a partial contribution is allowed if MAGI is in between $196,000 and $206,000.

If you are ineligible for a deduction, the best alternative is to contribute to a Roth IRA, if eligible, rather than make a nondeductible contribution to a traditional IRA. Neither type of account provides a deduction but when money is withdrawn from a traditional IRA some tax will result but distributions from a Roth IRA can be tax-free.

For married persons filing joint returns, you must have a Modified Adjusted Gross Income (MAGI) of $206,000 or less to make a direct contribution to a Roth IRA with the phaseout range running from $196,000 to $206,000.

If your MAGI makes you ineligible for a Roth IRA, you may still make a nondeductible contribution to a traditional IRA which can be a “back door” to getting money into a Roth IRA under certain circumstances.

If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line.

Dan Moisand is a financial planner with Moisand Fitzgerald Tamayo. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.

Outside the Box: I’m 73, single and work part time, should I put money into an IRA?

This post was originally published on this site

Q: I am 73 and single. Looking at my taxes for 2020, I think I can save a few bucks by putting money in an IRA. I don’t have a 401(k) or anything like that, and make some money working part time so if I understand it, I can make a deductible IRA contribution now. Is that true? Is that smart?

— Gene in Mobile

A.: Gene,

Working seniors, regardless of their age, have always been able to contribute to a Roth IRA if their income was within certain limits but if over age 70½, they could not contribute to a traditional IRA. The SECURE Act of 2019 eliminated that age restriction so now persons over age 70½ can contribute to a traditional IRA if they have earned income. Earned income is basically earnings from working and certain other payments like alimony from a divorce settled in 2018 or earlier.

Read: Live positive, age positive: The secret to wealth and health as you grow older

Whether making a contribution is smart depends on the particulars of your tax return and other factors. You should discuss the details with your adviser, but I will touch on a couple of factors here.

The 2020 contribution can be 100% of earned income up to a maximum of $7,000 for 2020 ($6,000 for anyone under age 50) and can be made as late as April 15, 2021. Whether you can deduct the contribution is dependent on your Modified Adjusted Gross Income (MAGI) and whether you participate in a qualified retirement plan. With no 401(k), you are probably not a plan participant.

For 2020, single taxpayers that are not participants in a qualified plan can make tax deductible contributions. Single taxpayers that are participants must have a MAGI of $64,999 or less to deduct a full contribution. Such participants with MAGI over $75,000 cannot deduct any of their contribution and those with a MAGI in between, get a partial deduction.

Unlike a Roth IRA or a 401(k) at your employer, you will still have to make a Required Minimum Distribution (RMD). Nonetheless, making a deductible contribution may still reduce your taxes some.

Read: I want to retire to a college town with warm weather and low taxes — where should I go?

One wrinkle to contend with applies if you make Qualified Charitable Distributions (QCD) to charity from a traditional IRA. For those over 70½, this is a popular and efficient way to give to charity because the donations can count toward RMD but are excluded from income. Once you make a deductible contribution to an IRA any QCDs you make are included in income until the amount of QCDs equals the cumulative total of all deductible IRA contributions made since the year you turned 70½.

For example, if you make a deductible contribution of $7,000 in both 2020 and 2021, the first $14,000 of QCDs are not tax-free distributions. You may or may not get some tax benefit from those donations as an itemized deduction.

If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line.

Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide from offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.

Retirement Weekly: I think my 1099-R is wrong — what can I do?

This post was originally published on this site

Q.: I took advantage of the 2020 RMD rule and returned what I had taken from my IRA thinking there would be no taxes. I just got a 1099-R showing the full RMD. That can’t be right. How do I correct it?

—Pauline

A.: Pauline,

If the 1099-R is incorrect, you will need to contact the firm that issued the statement to get it corrected. However, the 1099-R is probably correct.

Read: Are there new RMD rules this year?

Under the law, the firm issuing the 1099-R has no responsibility for reporting how much of a distribution is taxable. That responsibility rests on your shoulders as a taxpayer. The issuing firm need only report what was paid out of the IRA on 1099-R.

Not sure where to retire? Let us help you find the right spot

That does not mean you will pay any tax. Any funds returned to the IRA by Aug. 31, 2020 is considered a rollover and is not taxable. Normally, Required Minimum Distributions (RMD) are not eligible for rollover, but IRS guidance after enactment of the CARES Act that waived RMD for 2020 changed that. The guidance stated the normal 60-day time limit for rollovers would not apply and instead instituted a fixed deadline of Aug. 31, 2020 to return such distributions and avoid taxation.

Read: It’s not too late to save on your 2020 tax bill — here’s how

I get similar questions about 1099-Rs every year. The reporting of the gross distribution looks like an error but in most cases, it is correct and the person receiving it simply hasn’t learned how it is accounted for yet.

Here’s how the accounting typically works.

As with any gross amount reported on Form 1099-R, you declare the amount that is not taxable when you file your 2020 tax return. What I hear most tax preparers would do in your situation is put the gross distribution amount from 1099-R on line 4a as per the normal procedure. Then, they would place a zero in 4b of your Form 1040, and put a note on the return near those lines that it was “returned to the IRA under the CARES Act,” “CARES Act rollover,” “CARES Act,” or simply “Rollover.”

Read: These are the best new ideas in retirement

If you did not return all of distribution by the deadline, the portion that was not returned would be taxable. You would put that number on line 4b.

Read: 5 things to do if you inherit a Roth IRA

As I mentioned a moment ago, the discrepancy between the gross distribution reported and what should actually be taxable comes up in other situations. Three of the most common are other rollovers, Qualified Charitable Distributions (QCD), and distributions from accounts that had received after-tax contributions.

In all those cases, the reporting process looks like what I described above. You put the gross distribution on line 4a and the taxable portion on Line 4b. Then note why the numbers are different with “rollover,” “QCD,” or “See Form 8606” on the 1040. Form 8606 is the form used to determine the taxable amount of an IRA distribution when nondeductible contributions have been made to any of one’s IRA accounts.

If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line.

Dan Moisand’s comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.