Woody has put together this chart to make it easy for you to determine when the required minimum distributions must begin and under what period.
Inherited IRAs – Minimum Allowable Distribution Periods (PDF format, requires Adobe Reader)
(written by Ilyce Glink of thinkglink.com)
Summary: What happens when you make after tax contributions to a 401(k) plan and you now need the money? Can you withdraw just the after tax contributions and not pay any tax? Or, will the IRS require you to withdraw the funds in a proportionate way, based on the total amount in the plan?
Calculating After Tax 401(k) Contributions and Withdrawals
Q: I’ve searched your website but can’t find information about whether or not a distribution of 401(k) after tax contributions is taxable in any way. I have about $10,000 in a 401(k) from a previous employer that includes about $5,000 in after tax contributions. I need about $5,000 to help purchase a car but I don’t want to pay taxes on a $5,000 distribution. If I request the provider to send me only the after tax monies, will I be subject to taxes? I am more than 59 1/2. Thanks, DH
A: DH, when I read your letter, I realized that I had never heard of after tax contributions to a 401(k). I’m much more familiar with Roth IRAs and even Roth 401(k)s. So, I turned to my buddy, Woody Alpern, CPA, for some tax guidance. Here’s what he had to say (with some minor editing changes):
Woody’s Answer
Thanks for your question. There is not much information on this on the web because after tax contributions are very uncommon now especially since the ROTH came into effect. Also, most plans don’t allow after tax 401(k) contributions because they can greatly complicate the plans matching contribution discrimination testing calculations, which is certainly beyond the scope of the question you asked.
Specifically, your company’s plan document will dictate how this after tax contribution has to be treated. At a minimum, the IRS will require that the distribution of $5,000 be pro-rated between pre-tax and after tax contributions and any earnings associated with those contributions. Let me illustrate below with a very simplified example.
Assume your total contributions in the plan since inception are $10,000, and there have been $2000 in earning on this through the date that your actual distribution of $5,000 takes place. Also assume that of the $10,000 contribution, $5,000 of it was with after tax contributions and $5,000 of it was with pre-tax tax contributions. Unfortunately, you would be required to do a proration to determine how much of the $5,000 is from the pretax contributions versus the after tax contributions. Also, an allocation of the earnings would have to be made, which is all taxable. The calculation would be as follows:
Total pre tax contributions = $5,000 Total earnings subject to tax = $2,000
Total contributions and earnings $12,000
Ratio of total pre tax contributions and earnings subject tot total contributions ($7,000/$12,000) = 58.3333 percent
Taxable portion of $5,000 distribution = $5,000 X 58.333 percent = $2,916.67 = taxable portion of distribution subject to ordinary income tax rates, but not penalty since age is over 59 1/2.
You will need to ask your administrator the specifics in their plan document to see if their plan document has language stating something different (more stringent, like all comes from pre-tax first) before being sure this would be the methodology.
I hope this helps.
Woody Alpern – CPA/PFS www.yourwealthtax.com
Consider Using a Roth IRA Instead
If you qualify, you’re far better off stashing after-tax contributions in a Roth IRA rather than part of a 401(k). You might also be better off making a non-deductible contribution (if you qualify) to a non-deductible IRA. For more details, talk to you tax planner.
In this Woody’s Goodies, I have attempted to simplify and summarize the major provisions of the current drafting of the Houses version of The Health Care Reform Bill without too much editorial comments. However, I can’t help but pose the following ten questions that came to my mind after reading this bill. Perhaps you will have more questions and/or possible answers after reading my summary below.
1. How is such a huge government, mandated and administered health care program going to affect the quality of medicine in this country?
2. It appears that 8 million Americans will be subject to a 2.5% increase in taxes while still not having health coverage (I will illustrate this as a bullet point below). How will this be remedied?
3. Will insurance companies be able to afford the coverage they will be required to provide while being forced to stay within government mandated premium guidelines?
4. Will this new health care system create a huge underground black market medical system?
5. Will small businesses be able to afford to provide this required coverage?
6. How will this impact the ability of the U.S.A. to compete effectively in the world economy?
7. Does this mandate intentionally or unintentionally create a socialists health care system, and possibly a socialist’s economy?
8. Are there enough healthcare providers and facilities to handle the huge increase in volume this plan stimulates?
9. Will this program increase or decrease unemployment (see below the provision that exempts employers with less than $250,000 in gross salaries from being subject to this plan)?
10. Will this plan effectively drive down the cost of health care or have the unintended consequences of sky-rocketing such cost?
Summary of the bill:
1. A Health Insurance Exchange will be created. The government will run this “exchange”. Its purpose, although somewhat fuzzy in the reading of the bill, will be to give individuals and employers a place to comparison shop amount private and the new public insurers. It is supposed to work with state insurance departments to enforce this plan and provide consumer protections, facilitate the mandated enrollment, and administer the “affordability credits” (discussed below in more detail) to help low and middle-income individuals and families purchase insurance. A state can choose to operate their own exchange in lieu of participating in the national exchange provided they follow the federal rules (whatever they ultimately are);
2. A government run Public Health Insurance Option will be created. This will be one of the choices individuals and employers can choose from within the Health Insurance Exchange discussed above. The bill states it is to be financed only with the premiums being paid into it. It will have to provide the same coverage and adhere to the same policies as being mandated to the private insurers;
3. Insurers will have to provide guaranteed coverage at guaranteed rates. An individual will no longer be denied coverage or renewal of coverage due to their health status. Even if the individual has pre-existing conditions, they must be covered. Also, the bill prohibits lifetime and annual limits on benefits. Finally, insurance premium rates cannot be based on health status, gender or other factors other then age, geography and family size and still must be within certain government mandated guidelines;
4. A minimum insurance benefit package will be created by a new government supervised Advisory Committee. This new benefit package will serve as the basic benefit package for coverage in the Exchange and will ultimately become the minimum quality standard for employer plans. The basic package will include preventive services with no cost-sharing (meaning the insurance provider must pay for 100% of these services), mental health services, oral health and vision for children. It also caps the amount of money a person or family must spend on these covered services;
5. Affordability credits will be made available to low and moderate income individuals and families. The credits decline as income goes up (and so premium and cost sharing support is more limited as your income increases) and are completely phased out when income reaches 400 percent of the federal poverty level ($43,000 for an individual or $88,000 for a family of four). The Exchange (as discussed in point 1 above) administers the credits;
6. All new policies will be mandated to cap annual out of pocket spending by the insured;
7. Medicaid will be expanded. Individuals and families with income at or below 133 percent of the federal poverty level will be eligible for an expanded Medicaid program. This will be fully federally financed;
8. Medicare will be also modified and expanded for senior citizens and people with disabilities. It will improve coverage in the Part D drug program, eliminate cost-sharing for preventive services, increase the low-income subsidy programs, and modify a number of other provision related to simplifying the administration of Medicare;
9. Individuals will be responsible for obtaining and maintaining health insurance coverage. Those who choose to not obtain coverage will pay a penalty of 2.5 percent of modified adjusted gross income above a specified level;
10. Employers will have the option if providing health insurance coverage for their workers or contributing funds on their behalf. Employers can choose to contribute an amount based on eight percent of their payroll. If an employer chooses to offer coverage, rather then pay the eight percent, it must meet minimum benefit and contribution requirements further defined in the plan;
11. Small businesses (defined as businesses with payrolls that do not exceed $250,000) are exempt from the employer responsibility requirement. The payroll penalty would then phase in starting at 2% for firms with annual payrolls over $250,000 rising to the full 8% for firms with annual payrolls above $400,000. In addition, a new small business tax credit will be available for those firms who want to provide coverage to their workers rather then pay the penalty. Details t be further defined;
12. Other provisions of the bill include prevention and wellness measures supposedly designed to prohibit cost sharing for preventive services, create community based programs to deliver prevention and wellness services, provide funds to strengthen state, local, tribal and territorial public health departments, provide additional funds for more training of primary care doctors and health professionals, modernize Medicare through a major delivery system reform and other administrative reforms; and
13. The dilemma that effects eight million people – a single person with income of $43,000 or higher (or family of four with income of $88,000 or higher) is considered to be above the 400% poverty line. If you work for a company with a payroll of less then $250,000, the employer does not have to provide you or your family with healthcare insurance. Therefore, you would be subject to a 2.5% tax penalty if you decide not to buy coverage for yourself and/or your family meeting the minimum mandated guidelines. CBO says there are approximately 8 million of these types of people.
14. Example to illustrate the financial effect this would have on a single 50-year old, non smoking small business employee (where his employer’s payroll is less then $250,000 per year), who does not have health insurance. Looking on ehealthinsurance.com, the cheapest bare bones policy he could get is $1,620 per year. This individual cannot afford a $1,600 per year bare bones policy. This individual would get no subsidies under this bull, and is employer would face no penalty for not providing him with health insurance. He would end up without health insurance ad would have to pay approximately $1,150 more in taxes due to the 2.5% penalty. Interesting that in the debate President Obama had on February 21, 2008 with the then Senator Clinton, opposing her proposal for universal individual mandate to purchase health insurance, he said “In some cases, there are people who are paying fines and still can’t afford it, so now they’re worse off then they were”. He was referring to the mandate that Massachusetts has right now that is very similar to the plan Obama is now proposing.
You can withdraw money from an IRA penalty free (meaning it is subject to ordinary income tax rates, but not the 10% penalty) up to $10,000 for a first time home purchase. Specifically, the rules state:
1. Distributions up to $10,000 (lifetime limitation; each spouse is eligible);
2. Distributions must be used within 120 days to pay qualified expenses;
3. Qualified expenses include those to buy, build or rebuild a first home, including closing costs;
4. First time homebuyer can be the taxpayer, spouse, children, grandchildren, parents or other ancestors;
5. First time homebuyer means taxpayer (and spouse) have not owned a principal residence within the past two years and
6. You will need to file IRS Form 5329 for the year of withdrawal.
Of course if you are over 59.5, you can withdraw penalty free from your IRA in any case.
Credit boot camps are most easily found using the internet. A simple search on credit repair boot camp will bring up a slew of them. They typically cost between $150 to $200 dollars. I own the website mycreditcard.com so I do have knowledge of the credit repair world. Be careful is my first advice. Most promise much more then they can deliver. In fact, the only true legal credit repair people are supposed to be licensed attorneys. However, credit repair can be done, but its things that most people can do on there own and there is no real magic. I have spoken with representatives from Equifax at a recent Ilyce Glink personal finance workshop, and they confirmed to me that it’s the basics that keep credit good and then more basics that increase credit scores. I have also recently used creditplus.com myself to expedite a correction needed to my credit reports where I had a 30 day late erroneously reported. This cost me about $150 dollars to have this service report to all three of the major credit bureaus the correction that Bank of America sent in to the credit bureaus to remove a 30 day late. It would have normally taking 30 days to reflect this on my credit report, but they got the credit bureaus to update my reports in 3 days. The basics that these boot camps will focus on, and in fact the credit bureaus themselves state are effective tools for maintaining and /or increasing credit scores are as follows:
1. Obtain a copy of your credit report. You can call one of the three major credit bureaus and get a copy for a small fee. If in fact you have been recently denied credit, you can get it for free just by calling the credit bureaus and saying you were denied copy and want your free credit report. You can also try quizzle.com where you can get your report for free one time;
2. Make a list of inaccurate or untrue entries that you find in your credit report;
3. Call the credit bureau and tell the appropriate person that you want to dispute an entry on your credit report;
4. Don’t allow any credit bureau employee to talk you out of proceeding with challenging the incorrect credit information.;
5. Ask the person you speak with to send you a ‘Dispute Form”;
6. Complete the “Dispute Form” and mail it certified mail to the appropriate credit bureau or bureaus;
7. You will be notified of their decision in 30 to 45 days.
8. Pay your bill son time;
9. Don’t close old credit accounts, even if you paid them off. This hurts your credit;
10. If applying for new credit cards or mortgages, be careful you don’t do it with a broker that will pull your credit multiple times for each vendor they deal with. Each time your credit is pulled, it hurts your score;
11. There are other tactics that due likely require the assistance of a credit repair agency or an attorney that involve: (1) Using Federal Bankruptcy Act, Chapter XIII – Wage Earner Plan, (2) Injunctive Relief, Change of Address methods, (3) by checking out your bankruptcy file from federal archives, (4) use a 100 word consumer statement to contradict negative reporting that will show on your file, and (4) file a motion to vacate certain negative reporting by using a service of process technique that forces a creditor to appear in court with an attorney.
Typically this technique does work to improve your credit because most creditors simply don’t hold onto old files. They won’t easily be able to verify your written dispute. Also, many past creditors just don’t waist time verifying accuracy of credit reporting if they can’t make money on it. By law, if they don’t respond in writing to the credit bureaus within 30 days, the credit bureau must remove the negative item from your credit.