Archive for April, 2014:

One rollover per year IRS surprise

Written on April 30th, 2014 by Jamesno shouts

There has been a long standing tax rule for years that you could only do one rollover in your IRA every 12 months.  Any more frequent and it was considered a taxable distribution.

The IRS’ own publication 590 gave examples to this point.  The basics were that if you needed money you could take it out of your IRA and as long as you put it back within 60 days, it was considered a “rollover” and nontaxable.  The rule went on to state that you could only do this once in a 12 month period.  The big part was that the IRS in the publication considered each IRA as stand alone so that if you had multiple IRA’s the rule applied individually to each.

The game changed a few weeks ago with the courts ruled in the IRS favor regarding a case where an individual pulled money from IRA#1 and a little later pulled money from IRA#2.  He replaced both within the respective 60 day window, but the IRS said no deal.  The proceeds taken from IRA#2 were taxable since he had already done a rollover for IRA #1.  Although this contradicted their own publication, the court ruled in favor of the IRS.

So here’s the basics:  no matter how many IRA’s you have, if you plan to “borrow” money and replace it within 60 days. (called a rollover) you can only do this once per 12 months and no further IRA rollovers are permitted.  The IRS now looks at your IRA’s as one aggregate entity no matter how many you have.

At the present time this ruling only affects rollovers between IRA’s.  It does not affect 401k rollovers or Roth Conversions or transfers from one IRA custodian to another.  The bigger lesson here is that even if something is stated in an IRS publication, it can be challenged by the IRS and cost you.  Be aware.

Filed under General Tags:

GDP and Stock Prices

Written on April 30th, 2014 by Jamesno shouts

Top Down security analysis starts with GDP which is the overall growth in the economy (gross domestic product is all goods and service produced within the US geographic boundaries) and then flows down to sectors and finally stocks to see how they would benefit from economic growth.  In the long run, stock price growth should correspond to GDP.  In the short run you will always have supernormal growth periods in new industries, technology advances or companies that are leading their sectors.  Overtime basic economics says that if that company is making money hand over fist, that competitors will enter the market to absorb some of that profit and growth will slow as the industry matures.

Many high flying stocks from the past couple of years in areas such as 3D printing, Big Data, Internet and Biotech are getting sold fairly hard this year.  The stocks that are performing well are consumer staples, utilities and energy.  This isn’t exactly the leadership you would want to see if the economy is expected to hit a growth phase.

Then after all the Fed Stimulus, today’s GDP report came out.  This little bump in the road may have a few economists scratching their heads about how we are going to see 4% growth this year:

Filed under General, Investing Tags:

IRA high yielding investment tax trap

Written on April 25th, 2014 by Jamesno shouts

This Marketwatch article on high yielding stocks (click here) got me thinking that that it might be a good idea to reiterate a warning to investors regarding some tax issues with the strategy.  In all fairness, the author tells investors with IRA’s and 401k’s to examine tax rules, but I think many spot the outsized yields and really don’t think about the tax drawbacks, let alone the potential financial warning signs that oversized yields bring.

LP’s and MLP’s:

If you see a stock or investment with LP in the name, think twice about putting that in your IRA.  Why?  LP’s or MLP’s are partnerships and have different tax structures than corporations.  They are structured as pass through type entities.  If you buy the stock, then you become a limited partner.  This is great if you hold the investment in a taxable account, because as a limited partner come tax time you get a K1 (instead of a 1099) and get to claim your share of depreciation and non-taxable return of capital (along with the nice dividends).  However, this is a nightmare if you hold in an IRA.  An IRA is officially its own entity, so if K1 income is issued to an IRA then your IRA gets to deal with a separate tax issue called “unrelated business taxable income” or UBTI for short.

Here is the IRS’ definition of UBTI:

The term “unrelated business taxable income” generally means the gross income derived from any unrelated trade or business regularly conducted by the exempt organization, less the deductions directly connected with carrying on the trade or business. If an organization regularly carries on two or more unrelated business activities, its unrelated business taxable income is the total of gross income from all such activities less the total allowable deductions attributable to all the activities.

You will note that the definition refers to exempt organization, typically you associate UBTI with a tax exempt org that has unrelated income.  However, this also pertains to your IRA……..

So what happens when you hold an LP or MLP in your IRA?

if your total UBTI (K1) income from these investments if over $1000, then your IRA / Custodian must file a form 990-T and your IRA has to pay the tax.  This means a distribution will have to come out of your IRA and go direct to the IRS to cover tax due on these investments, since your IRA is the limited partner (not you).  Furthermore, if you are under 59 1/2 you will incur an early withdrawal penalty and ordinary income tax on the money that comes out of your IRA to pay tax on the UBTI.  It isn’t pretty.

What’s an alternative?

The alternative is MLP type mutual funds that hold some of these high yielding investments but all income is 1099.  You are a shareholder of the fund, not a partner of the LP.  I’ve used several of these for clients and we continue to collect a nice dividend on a diversified set of energy companies, and don’t have to worry about K1′s.

ETF’s structured as LP’s:

there are a lot of ETF’s on the market and several are structured as Limited Partnerships (LP) so be careful if investing in them inside your IRA.  Most are the commodity tracking ETF’s that track things like: oil, nat gas, agriculture, etc.  These are fine to use as long as you pay attention to the distributions.  Most are simply non-distributing funds that track the futures market, but be careful if you buy one that has a yield.  Holding it to long could toss you over the $1000 threshold for filing a 990.

Filed under Investing Tags:, ,

More tax questions

Written on April 14th, 2014 by Jamesno shouts

A last minute tax question and resource for planning your exemptions for next year:

A client just emailed me with a last minute tax question that I thought would be beneficial to share with others.  ”I bought a new car in 2013 and instead of the annual ad valorem tax, I paid the new one time Georgia Title Ad Valorem Tax (TAVT), is it deductible?”  Georgia passed a law a few years back that removed the annual ad valorem tax and imposed a one-time tax on vehicle purchases made after 2012 (some 2012 were grandfathered if you elected), this basically meant that the annual  birthday tax was eliminated but instead was paid upfront.  So for all of you that itemize your deductions on Schedule A, can you deduct this one time tax just like you did each year with your ad valorem tax?  Unfortunately, the new tax is structured more like a sales tax instead of an annual property tax, so the short answer is no.  When you itemize you can however elect to deduct State Income taxes or Sales Taxes (just not both), so if your state income tax was real low then it is possible this TAVT tax could be lumped in with your Sales taxes on Schedule A and in that case it would be deductible.

Tax planning for next year:

I have received a number of questions on how to better sync withholdings on your paycheck so that it is closer to your actual tax liability.   This is helpful when you consistently find yourself owing money to the IRS each April 15th.  (or if you continually get a refund and are tired of giving uncle sam an interest free loan).  Below are two links to help you better plan your withholdings:

- IRS Withholding Calculator:

- If you really are a glutton for punishment then jump right into Publication 505 to learn more: