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Tax Planning Topics

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A Guide to 1099-R

If you’ve started taking distributions from your retirement account, you will soon receive a new form that will play a crucial role as you file your 2017 taxes. A 1099-R form is issued for all IRA distributions that are made payable to an IRA or Roth IRA account owner or beneficiary and for all IRA distributions that go to a Roth IRA account, as well as all employer plan distributions.

A copy of this form is sent to the IRS in February before you file your tax return, so it is crucial that it accurately records the amount of income you received in order to avoid any unnecessary taxes and penalties.

Click here to download a Guide to IRS Form 1099-R.

Have questions? Click here to contact the office nearest you.

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Calculating the Pro-Rata Rule in 5 Easy Steps

What is the pro-rata rule?

The pro-rata rule is the formula used to determine how much of a distribution is taxable when the account owner holds both after-tax and pre-tax dollars in their IRA(s).  For the purposes of the pro-rata rule, the IRS looks at all your SEP, SIMPLE, and Traditional IRAs as if they were one.  Even if you have been making after-tax contributions to a separate account for years, and there have been no earnings, you cannot isolate your after-tax amounts and must take your other IRAs into consideration.

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If you hold both pre-tax and after-tax money in your IRA, you’ve likely heard of the pro-rata rule. It’s important to understand how this rule is calculated and how it can impact your retirement funds. In simple terms, the pro-rata rule is used to determine how much of a distribution is taxable when you have a combination of both pre-tax and after-tax dollars in your account.

As you proactively plan for retirement, understanding the tax implications of your various accounts can be key to maximizing your savings. Using the pro-rata rule to help determine the tax on your distributions can give you a better idea of how much money you’ll owe Uncle Samin retirement.

Here's five steps you can use to calculate the pro-rata rule:

#1 - Total up all of your IRAs.  Calculate the total balance of all of your IRAs.  Include the balanc-es from each of your IRA accounts, including SEP IRAs and SIMPLE IRAs.  Roth IRA balances and balances from any non-IRA based company plans are NOT included for this purpose.

#2 - Total up all after-tax dollars in IRAs.  Calculate the total balance of all after-tax dollars in all of your IRAs.  After-tax dollars are either non-deductible contributions made directly to an IRA or rollovers of after-tax dollars from a company plan.  If this is not the first year you have had after-tax dollars in your IRA, you should be able to find the previous year’s after-tax total on IRS Form 8606.

#3 - Calculate your percentage of after-tax dollars.  Divide your after-tax IRA dollars (step 2) by your total IRA balance (step 1).  If you have $20,000 of after-tax dollars in all your IRAs and the total balance of all your IRAs is $100,000, your percentage of after-tax dollars is 20% ($20,000/$100,000 = 20%).

#4 - Determine the taxable amount of your distribution.  Take the total of all your distributions and multiply it by the percentage you have arrived at in step #3.  This is the total amount of the distribution that is tax free.  If, in our example, a distribution of $10,000 was made, the tax-free portion would be $2,000 (20% x $10,000 = $2,000).  The remaining portion of the distribution ($8,000) would be taxable at ordinary rates.

#5 - Exception for rollovers to a company plan or charitable rollovers.  Under the Tax Code, only pre-tax dollars can be rolled from an IRA into a company plan.  If you are making a rollover from your IRA to a company plan, disregard the pro-rata rule altogether.  Just be careful not to roll over more than the total amount of pre-tax dollars in all your IRAs.  Qualified charitable distributions (QCDs) from IRAs also disregard the pro-rata rule.

For professional assistance with proactive tax planning for your retirement accounts, make sure to contact us. Click here to contact the office nearest you. 

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