IRA

Q&A: The IRS is finally staffing up. Here’s how to get your coronavirus stimulus money

June 29, 2020 By Liz Weston

Dear Liz: We do not make enough income to file tax returns, so we used the IRS site to apply for our economic stimulus payment ($1,700 for one adult and one teenage child). We received a response email stating our information was received successfully by the IRS several weeks ago. We included our bank deposit information for a fast direct deposit but the money has not arrived and we hear that the government ran out of money. We are desperate. What can we do or who can we speak with about this delay?

Answer: The government did not run out of money, and at a minimum you should be able to file a tax return next year to get your stimulus payment as a refundable credit. Since you need the money now, though, you should follow up with the IRS.

The IRS has reopened the general taxpayer helpline that was shuttered because of the coronavirus pandemic, but it has also added thousands of phone reps to a special hotline to deal with stimulus payment problems: (800) 919-9835. That’s the number you should call to inquire about your payment.

(Previous columns have dealt with people’s refunds being held up because the IRS didn’t have enough workers to open its mail. Tax processing centers are reopening, but it will take awhile to work through the backlog. You can check the status of a refund through the “Where’s My Refund?” tool on the IRS site or by calling (800) 829-1954.)

Q&A: Tapping IRA creates a taxing problem

June 29, 2020 By Liz Weston

Dear Liz: I took $250,000 out of my retirement account in 2019 to set up five 529 accounts for my young grandchildren. As a result, my federal and state tax bills are $80,000. I’ll need to take that money out of my IRA. Will I keep having to pay large tax bills in order to pay for that one-time large withdrawal?

Answer: While your heart was in the right place, your money wasn’t. Withdrawals from IRAs are taxable, and such a large withdrawal almost certainly pushed you into a much higher tax bracket. If you had consulted a financial planner or a tax pro, they would have advised you to either fund the 529s from a non-retirement account or to make smaller withdrawals over several years to avoid such a big tax hit.

If you continue to tap your IRA, you will continue to owe taxes on the money you withdraw. The $80,000 will incur state and federal taxes. If you again pay the tax bill on the $80,000 using your IRA, you’ll owe taxes on that money as well, and so on.

You may not think that’s fair, but the reason your IRA is taxable now is because you got a tax deduction when you made the original contributions, and the money has been growing tax deferred in the meantime. Eventually, the government wants to get paid back for those tax breaks.

Q&A: Inheriting an IRA can get messy

March 30, 2020 By Liz Weston

Dear Liz: My brother passed away at age 47. My mother was named beneficiary of his retirement account. We opened an inherited IRA under her name. Sadly, my mother recently passed away, and my father is the beneficiary of the account. Does my father open a regular IRA or inherited IRA? How would the title on the account be listed with my mother and brother deceased? Are they both listed?

Answer: Inheriting an inherited IRA complicates an already complex set of rules.

The regulations are different depending on whether the person inheriting is a spouse. Spouses can treat the inherited account as their own. They can leave the money where it is, make new contributions or transfer the funds to another retirement account they own. They also have more flexibility in how to take required minimum distributions from the account.

Non-spouse beneficiaries, like your mother, don’t have the option of treating the IRA as their own. They must set up a new inherited IRA and start distributions. Until this year, non-spouse beneficiaries could take distributions over their lifetimes. Now non-spouse beneficiaries are required to drain their inherited IRAs within 10 years.

How the account is titled is important, because improper titling can cause it to lose tax deferral and accelerate the tax bill. Let’s say your brother’s name was Tom Johnson and he died in March 2019, leaving his IRA to your mother, Mabel Johnson. A correct title for the new inherited IRA would be “Tom Johnson (deceased March 2019) Inherited IRA for the benefit of Mabel Johnson.”

Your family’s situation creates a hybrid of the two situations. Your dad would have an inherited spousal IRA, but his mandatory withdrawals would be based on your mother’s required minimum distributions, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

Your dad should open a new inherited IRA, Luscombe says. Assuming his name is Bill Johnson, the title of the inherited IRA should be “Tom Johnson (deceased March 2019) Inherited IRA for the benefit of Bill Johnson, successor beneficiary of Mabel Johnson.”

Q&A: Reducing taxes in retirement

March 23, 2020 By Liz Weston

Dear Liz: I agree with this concept of delaying Social Security to lessen overall taxes and have a further suggestion. My spouse and I are gradually converting our traditional IRA account funds to Roth IRAs. The converted funds are immediately taxable but could continue to gain in value and future distributions would not be taxable. Also, Roth accounts don’t have required minimum distributions.

Answer: Conversions make the most sense when you expect to be in the same or higher tax bracket in retirement.

That’s not the case for most people because they’re in a lower tax bracket when they stop working. Some older people, however, do face higher tax rates in retirement — typically because they’ve been good savers, and required minimum distributions from their retirement accounts will push their tax rates higher.

When that’s the case, they may be able to take advantage of their current lower tax rate to do a series of Roth conversions.

The math can be tricky, though, so it’s advisable to get help from a tax pro or financial planner. You don’t want to convert too much and push yourself into a higher tax bracket, or trigger higher Medicare premiums.

If your intention is to leave retirement money to your heirs, Roth conversions may also make sense now that Congress has eliminated the stretch IRA.

Stretch IRAs used to allow non-spouse beneficiaries — often children and grandchildren — to take money out of an inherited IRA gradually over their lifetimes. This spread out the tax bill and allowed the funds to continue growing. Now inherited IRAs typically have to be drained within 10 years if the inheritor is not a spouse.

To compensate, some people are converting IRAs to Roths — essentially paying the tax bill now, so their heirs won’t have to do so later. Heirs would still have to withdraw all the money in an inherited Roth IRA within 10 years, but taxes would not be owed.

Tuesday’s need-to-know money news

February 25, 2020 By Liz Weston

Today’s top story: Home Down payment – more attainable than you may think. Also in the news: The best balance transfer credit cards for business, the SmartMoney podcast tackles converting an IRA to a Roth, and how to avoid higher airline baggage fees.