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Peter Sweetser
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Can I make a charitable gift from my IRA without paying income tax on the distribution?

Yes, but there are a few requirements. An IRA Qualified Charitable Distribution (QCD) is an alternative way for you to give to a charity without paying income tax. The QCD was put in place permanently as part of H.R.2029 — Consolidated Appropriations Act, 2015.

Here is how it works. Firstly, to be eligible, the account holder must be 70½ or older at the time of the distribution. Secondly, a QCD can only be made from a Traditional or Roth IRA. Thirdly, each individual can donate up to $100,000 per year to one or more qualified charities.

Unlike a typical IRA distribution, no income tax is paid. Please note: the taxpayer cannot take the contribution as a charitable deduction on their Federal Income Tax return — the amount is not included in the donor’s gross income. However, it can be counted as all or a portion of one’s IRA required minimum distribution. If you are uncertain, confirm with the organization that it is qualified to accept tax-deductible charitable contributions. Finally, the check should be made payable to the charity.

There are more details to consider and an IRA QCD is not right for everyone, so speak with an investment professional and discuss what might be right for you. As always, I recommend including your accountant or tax preparer in the decision before you make a transaction.

I'd like to rollover my 401(k) plan to FAM Funds. My employer is offering me early retirement when I turn 55. The company told me that I can take the distribution as a lump sum. Any advice?

Yes. A direct rollover of a 401(k) to a FAM Funds Traditional IRA is a nice option because it allows you to avoid both the 10% early distribution penalty and any Federal income tax. However, if you take money from your IRA before 59 ½, with a few exceptions, you will incur the 10% early distribution penalty. So, if your intent is to move your 401(k) into an IRA and not touch it until you’re in your sixties, then a direct rollover is a valid option. I always recommend that you consult your accountant or tax preparer before you make a transaction.

Can I consolidate different IRAs into one FAM Funds IRA?

Yes, but it’s important to understand the advantages and potential disadvantages before you consolidate. To begin with, there are two types of IRAs — Traditional and Roth. Traditional includes Rollover and Spousal IRAs which can be consolidated (rolled over), even from different companies, into one FAM Funds Traditional IRA. Roth IRAs may also be combined including Roth 401(k)s.

Rolling over separate retirement accounts of the same type into one at FAM Funds is an option you should consider. Some of the benefits include: tax-free consolidation of the accounts, fewer statements, time savings, and less potential for confusion. For example, miscalculating a Required Minimum Distribution (RMD) may lead to a 50% IRS penalty tax.

However, there are circumstances when it may not be wise to consolidate retirement accounts. For instance, to avoid a mandatory Federal income tax withholding, investors with a qualified retirement plan such as a 401(k) should make sure that a “direct” rollover option is available before consolidating. This way the account owner does not take possession of the assets and usually retains their tax-deferred status because the distribution check is payable to the IRA’s custodian or trustee.

I always recommend that you consult your accountant or tax preparer before you make a transaction.

Can a self-employed IRA investor contribute to a Traditional IRA if they also contribute to a SEP?

Yes, if they are under age 70½ and have eligible earned income. Please Note: Contributing to a SEP makes the person an active participant in an employer-maintained retirement plan during those contribution years. Consequently, the IRA contribution may not be fully deductible depending upon the investor’s modified adjusted gross income (MAGI). I always recommend that you consult your accountant or tax preparer before you make a transaction.

Is there an income requirement for making Traditional IRA contributions?

Basically, a person just needs earned income from personal services rendered to meet the requirement. The IRS defines this as any amount listed in the Form W-2 (Wage and Tax Statement) “Wages, Tips, Other Compensation” box less the total shown in the “Nonqualified Plans” box. Please Note: IRA Publication 590 indicates that taxable alimony and separate maintenance payments are also eligible for contributions. I always recommend that you consult your accountant or tax preparer before you make a transaction.

How many Traditional IRAs can a person have?

An investor may have more than one Traditional IRA, but once they sign one set of opening documents and make subsequent contributions under the same plan agreement, only one Traditional IRA exists. If an individual has multiple IRAs, they must combine annual contributions to monitor specified maximum yearly contribution limits. I always recommend that you consult your accountant or tax preparer before you make a transaction.

What are the possible tax consequences for withdrawing money from my IRA?

There are several items to consider before taking a distribution from a tax-deferred account such as a Traditional or Roth IRA. First, a Traditional (“deductible”) IRA withdrawal is considered ordinary income. Typically, the entire distribution is taxed as ordinary income. Distributions to shareholders younger than 59½ may also be subject to a 10% IRS penalty unless an exception applies. Second, a Roth distribution is tax-free if you have met the necessary requirements like owning the account for five or more years and being 59½ or older. Please note: if you take money from a regular (taxable) non-retirement account, such as a single or joint account, you may be subject to capital gains taxes.

Let’s say you need $5,000 to take a vacation. If you withdraw it from the Traditional IRA and you’re in a 30% tax bracket, you would incur $1,500 in taxes. However, the Roth distribution could be tax-free. Meanwhile, your taxable single or joint account may be subject to capital gains tax on proceeds above your original cost at rates ranging from 0% to a maximum of 15% for long-term gains. Each scenario has different tax ramifications and your decision should be based upon your situation at any given time. Due to the complex IRA distribution rules, one size does not fit all so please contact me to discuss what might be right for you. I always recommend that you consult your accountant or tax preparer before you make a transaction.

Can you shed some light on the provision that allows for the conversion of a Traditional IRA to a Roth IRA without income limits?

Beginning January 1, 2010, the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) allows for the conversion of a Traditional IRA to a Roth IRA without any income restrictions. This is significant, particularly for those with a modified adjusted gross income (MAGI) greater than $100,000 who previously were excluded from many Roth IRA benefits. It’s also very compelling to convert a non-deductible IRA. However, there are a few important points to consider before converting.

The most important one is taxes. Any conversion amount is a taxable event that will add to your taxable income. For example, if you converted in 2010, you could have spread the tax over two years — 2011 and 2012. However, conversions outside 2010 require all taxes to be paid the next year.

Further considerations include assessing whether your tax rate will be higher or lower when you retire than it is now. Also, what will be your funding source for tax payments? If your retirement account is the only fund for your taxes, you may want to think long and hard before making a conversion despite many of the benefits.

Please remember that you can convert any Traditional IRA from another company into a FAM Funds Roth IRA. I always recommend that you consult your accountant or tax preparer before you make a transaction.

Is an IRA contribution postmarked on or before the IRS Federal Tax Filing deadline, but received after that date, considered on time?

Yes, under IRC Sec. 7502(a) any payment that must be made by a specific date under IRS laws and is delivered by the U.S. Postal Service after the date, is deemed made on the postmarked date. It is recommended that financial organizations accepting contributions after the deadline place the envelope bearing the postmark in the investor’s file and contact the customer to confirm the tax year for the contribution.

How often should I review my IRA beneficiaries?

You should review both your primary and contingent IRA beneficiaries annually. Perhaps you have had changes in your relationships such as a wedding, the death of a loved one, or a divorce. As the IRA distribution process occurs following your death, if the primary beneficiary is alive, your account will go to them. If your primary beneficiary predeceases you, the IRA is distributed to the contingent beneficiary. If you have not assigned a contingent beneficiary, then it goes to your estate.

If your situation has changed, there may be unintended consequences from your beneficiary designations. For example, your IRA could be paid to your ex-spouse or current spouse instead of your children. Also, a later born child may not be named as a beneficiary. Additionally, there can be negative tax consequences if your IRA goes to your estate instead of your spouse or other beneficiaries. Please Note — this applies to these retirement accounts: Traditional, Roth, SEP, SIMPLE, Individual(k), and 403(b)(7). 

How can I change the beneficiary on my IRA?

To change the beneficiary designation on your retirement account, you must complete a Change of Beneficiary Form and return the form to our office. Change of Beneficiary Forms can be accessed under Shareholder Services — Applications & Forms.

Can an active participant in an employer-sponsored Qualified Retirement Plan (QRP) make a Traditional IRA regular contribution?

Yes, if they are younger than 70½ and have earned income. However, an investor’s status as an active participant in a QRP, such as a 401(k), may limit the tax deduction from the Traditional IRA contribution. A person’s Form 1040 tax filing status and modified adjusted gross income (MAGI) factor into determining the deduction.

Can a person with an IRA title their account in the name of their living trust?

No, IRAs are only for an individual’s benefit. An IRA is a person’s trust with a financial organization typically acting as the trustee of their assets. However, a living trust may be named as the beneficiary and upon death of the holder the IRA is paid into the trust and the assets are distributed according to the provisions. 

All investing involves risk including the possible loss of principal. Before investing, carefully read the fund’s prospectus which includes investment objectives, risks, charges, expenses and other information about the fund. Please call us at 800-932-3271 or visit famfunds.com for a prospectus or summary prospectus.

Securities offered through Fenimore Securities, Inc., Member FINRA/SIPC and advisory services offered through Fenimore Asset Management, Inc.

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FAM Funds: IRAs - Retirement Resource Q&A
Peter Sweetser, our Retirement Plans Specialist, answers a variety of questions regarding IRAs.