Ed Slott was named "The Best" source for IRA advice by The Wall Street Journal and called "America's IRA Expert" by Mutual Funds Magazine. He is a widely recognized professional speaker and educator specializing in retirement distribution planning, teaching both financial advisors and consumers how to best take advantage of our complicated tax code.

-- Have something you want to ask Ed? Send your questions to mailbag@irahelp.com

This week, he fields some questions from investors about non-deductible IRAs and RMDs on inherited IRAs.

Question 1:

I will turn 70 next year. Does it make any sense to use my traditional IRA to fund a share of a (multi-member) private placement LLC? The potential investment consists of a HUD contracted apartment building. In the first year, the managing partners have to sign personally on the bank mortgage. After 366 days, the mortgage will be refinanced and become non-recourse. My question is: Will there be unrelated business taxable income (on the leveraged portion of the asset) or is there an exclusion? I would be a passive investor. Can you point me in the right direction? 


Much appreciated,

Gerry

Answer:

There are too many variables to provide an authoritative answer to your questions. However, there are some items you must consider: 1. Satisfying your required minimum distribution (RMD) from the account - will there be enough liquidity? 2. If the property is leveraged, the IRA might have to pay income taxes on earnings attributable to the financed portion. There is an exemption for the first $1,000 of earnings. In order to do what you are suggesting, you will have to locate a custodian that will do the transaction. Perhaps the custodian can provide added guidance. The tax code and IRS have no rules about diversification in an IRA.

Question 2:

Ed,

My wife's only IRA is one that she inherited from her dad. She has been taking required minimum distributions (RMDs) since 2005. If we open a non-deductible IRA for her and immediately convert it to a Roth will any of the conversion be taxable?

Thanks,

Ken

Pasadena, CA 

Answer:

The only taxable amount would be any appreciation on the non-deductible IRA. You don't have to consider the inherited IRA when you convert owned IRAs to a Roth IRA.

Question 3:

My mother died on December 23, 2011 and she did not take an RMD from her IRA for 2011. I am the beneficiary of the IRA. Since there weren’t enough business days left in the year to process the transfer to an inherited IRA, the establishment of the inherited IRA and the withdrawal of the RMD based on her age will not take place until early 2012. How does one deal with this situation?

Does her final return need to include Form 5329 seeking forgiveness for the late withdrawal penalty or do I have to file it with my return? Will I have to report two distributions in 2012; one based on the decedent's age and another based on my life expectancy? 

Answer:

You will have to file Form 5329 with your return. Attach a letter explaining the situation and indicate that you have already taken her 2011 RMD in early January 2012 and ask that the 50% penalty not be applied. In 2012, you will also have to take your first RMD on the inherited IRA based on your attained age on 12/31/12 using the Single Life Expectancy Table.

Question 4:

As a loyal newsletter subscriber for some years I appreciate your IRA insights and now need your help.

How I can reverse my custodian's erroneous duplicate 2011 distribution from my beneficiary (non-spousal) IRA, which has an RMD now based on my own remaining 21-year life expectancy table.

This beneficiary IRA was received from my deceased mother nine years ago and I have properly taken the correct RMD every year since.

In 2011, however, the custodian mistakenly issued an unrequested duplicate distribution through its clearing-house, but refuses to reverse/correct its mistake claiming tax law prohibits ANY reversal in a "Beneficiary, Non-Spousal" account.

Is this true? What is the tax law source for this stated prohibition, for my tax accountant/ attorney?

Answer:

Sadly the custodian is correct about the tax code [§408(d)(3)(C)]. Your only hope is to have them reverse the transaction and suppress the tax reporting for both transactions. We have seen this done in other situations where it was an administrative error. If they will not correct it, you will have two distributions in one year and you will owe income tax on the total amount distributed. You could consider doing a trustee-to-trustee transfer to a more customer friendly custodian. 

-- Have something you want to ask Ed? Send your questions to mailbag@irahelp.com