IRS Provides Relief for 60-Day Rollover Failures

Starting August 24, 2016, the Internal Revenue Service (IRS) has enacted new procedures for taxpayers who miss the 60-day deadline for retirement account rollovers to get relief. Taxpayers who qualify can submit a self-certification letter to either the IRA custodian or plan administrator to get an extension of their deadline.

Previously, 60-day rollover mistakes could be remedied through Private Letter Rulings (PLRs). Unfortunately, the cost of PLRs was increased in 2016 to $10,000, and this fee doesn’t even include the professional fees a client would need to pay to file the ruling. The new procedures provide a simpler and free method to avoid the negative tax consequences of a failed rollover.

The IRS explains the new procedures in Revenue Procedure2016-17. In this procedure, the taxpayers apply for an extension of the 60-day deadline to avoid the penalties and/or taxes of a failed rollover.

To qualify for this new procedure, one of more than eleven possible circumstances must apply to the taxpayer. These include death or serious illness of a family member, incarceration, postal errors, and misplaced checks.

Revenue Procedure 2016-17 includes a sample letter that the taxpayer can use to provide written certification to the IRA trustee or plan administrator. Once filed, the individual must make the contribution to the plan or IRA.

This does not apply to people who have violated the once-year or any other rollover rule. 


Sometimes life events do get in the way of IRA rollovers. It is great news to hear that the IRS understands this and now provides methods for avoiding the penalties.  

Qualified Charitable Distributions Are Here To Stay!



Qualified Charitable Distributions (QCDs) are distributions from your IRA that go directly to a charity without paying any taxes. For example, if you wish to donate $10,000 towards your church, you could do a $10,000 distribution to your church from your IRA. As long as the money goes directly to the church or the check is made payable to it, that $10,000 is not taxable. As a bonus, that $10,000 also counts towards your Required Minimum Distribution (RMD).

QCDs were not part of permanent legislation. For years, Congress would renew QCDs for a single year. Would they renew it next year? You never knew. Fortunately, a bill called the Protecting Americans from Tax Hikes (PATH) Act of 2015 made QCDs permanent.

There are some important rules when dealing with QCDs. Here are a few of them:
  • They only apply to IRA owners or beneficiaries who are actually 70 ½ or over. If you aren’t 70 ½ yet but will be later this year, you have to wait until you actually 70 ½.
  • Maximum contribution of $100,000
  • Counts towards RMD
  • Must be made by direct transfer or a check payable to the charity.
  • Does not count towards deductions, but is not included in income.



The PATH Act really helps us by making QCDs permanent. Knowing that you can do one each year helps you do better tax planning for now and the future. If you have questions on doing QCDs, please give us a call at (702) 870-7711.

Do you need a health care power of attorney?

Do you really need a health care power of attorney? According to Las Vegas attorney, Rebeccah Murray, "Anybody over the age of 18 needs a health care power of attorney." This important document will allow family or friends to talk with your doctors if you are not able to.

I heard a story of some parents who received a call at 2 am. Their daughter, who lived several hours away at college, was injured and the hospital needed to review insurance information. When the parents asked about the daughter's condition, no information could be given because the daughter was over 18 and no health care power of attorney existed. Imagine driving for several hours to the hospital without knowing what was going on. This would be a nightmare!

This document is very simple and you can find one on the internet or at a legal forms store. Most require a notary to witness the signature. Many attorneys will include one as part of a living trust.

Who do you name as your power of attorney? It could be your parents, a sibling, or a close friend. Anybody that you trust with your health information. You can also name multiple people. For example, I named my wife as my health care power of attorney. If my wife isn't able to perform the duties, I named my sister. My wife and I will be listed on my soon-to-be-18 year old son's health care power of attorney.

You also need to make sure that these people have access to the document should it be necessary. Storing it in the cloud in a site like Dropbox can make it simple to retrieve at a moments notice. This way my sister, who lives in Boston, can talk with my doctor here in Las Vegas.

The health care power of attorney is a simple document that everybody over 18 should have. Do your friends and family a favor and get it done.

Time is Money!

I am often asked, "When is the best time to start financial planning?" In my opinion, there are two best times to start. The first is when you get your first job. If you can learn to live without 10% of your income starting day one, you will be able to save lots of money and watch it grow.

The second best time to start financial planning is right now. If you missed the first best time, and unfortunately most people to, starting today is better than tomorrow. The more time you have between today and the day of your retirement, the more your money can grow.

People who start saving early have a distinct advantage - compound interest. Earning interest on your interest can have a tremendous impact on your growth rate.

Here is an example with two people, Tom and John. Tom starts saving early, putting away $2,000 a year for 10 years starting at age 21. Then he lets the money continue to grow until 65. John wants to wait. He starts at age 31 putting away $2,000 and continues doing so until age 65. They both invest in the same hypothetical investment that earns 8%. Tom's total contribution is $20,000, Johns is $70,000. Who ends up with the most money?



Age
Tom Contribution
Tom's Total
John Contribution
John's Total
21
$2,000
$2,000
$0
$0
22
$2,000
$4,160
$0
$0
23
$2,000
$6,493
$0
$0
24
$2,000
$9,012
$0
$0
25
$2,000
$11,733
$0
$0
26
$2,000
$14,672
$0
$0
27
$2,000
$17,846
$0
$0
28
$2,000
$21,273
$0
$0
29
$2,000
$24,975
$0
$0
30
$2,000
$28,973
$0
$0
31
$0
$31,291
$2,000
$2,000
32
$0
$33,794
$2,000
$4,160
33
$0
$36,498
$2,000
$6,493
34
$0
$39,418
$2,000
$9,012
35
$0
$42,571
$2,000
$11,733
36
$0
$45,977
$2,000
$14,672
37
$0
$49,655
$2,000
$17,846
38
$0
$53,627
$2,000
$21,273
39
$0
$57,917
$2,000
$24,975
40
$0
$62,551
$2,000
$28,973
41
$0
$67,555
$2,000
$33,291
42
$0
$72,959
$2,000
$37,954
43
$0
$78,796
$2,000
$42,991
44
$0
$85,100
$2,000
$48,430
45
$0
$91,908
$2,000
$54,304
46
$0
$99,260
$2,000
$60,649
47
$0
$107,201
$2,000
$67,500
48
$0
$115,777
$2,000
$74,900
49
$0
$125,039
$2,000
$82,893
50
$0
$135,042
$2,000
$91,524
51
$0
$145,846
$2,000
$100,846
52
$0
$157,514
$2,000
$110,914
53
$0
$170,115
$2,000
$121,787
54
$0
$183,724
$2,000
$133,530
55
$0
$198,422
$2,000
$146,212
56
$0
$214,295
$2,000
$159,909
57
$0
$231,439
$2,000
$174,702
58
$0
$249,954
$2,000
$190,678
59
$0
$269,951
$2,000
$207,932
60
$0
$291,547
$2,000
$226,566
61
$0
$314,870
$2,000
$246,692
62
$0
$340,060
$2,000
$268,427
63
$0
$367,265
$2,000
$291,901
64
$0
$396,646
$2,000
$317,253
65
$0
$428,378
$2,000
$344,634

It is amazing that Tom contributed $50,000 less, but came out with $83,744 more at the end. He just started 10 years earlier. Albert Einstein put it best when he said “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”

When you chart the value of an account growing with compound interest, it always starts out rather flat in the early years. At time goes on, it starts growing at a steeper and steeper rate. Check out this chart:


This chart shows what would happen if somebody saved $2,000 a year starting at age 21 and the account grew at 8%. As you can see towards the end of the graph, the difference between the years is growing significantly. There is a difference of about $63,800 in the last year alone! Thank you compound interest!

Compound interest doesn't care how rich or how poor you are. It works the same for everybody. The growth rate on this graph would be the same for annual contributions of $200, $2,000, or $20,000. Obviously numbers on the left side of the graph would change, but the slope would remain the same.

Unfortunately, compound interest discriminates on age. Everybody starts at the same place - the left - on this graph. It doesn't matter if you are 21, 45, or 70, you always start at the left where the money isn't growing quickly. The younger you are when you start, the farther you will go to the right. If you start at age 45, you would have to save to age 90 to get to the same end point on this graph.

Compound interest can work against you. You may think, "How can that be, Mike? You just said it was really great!" It works against you when you are borrowing money, especially on credit cards. If you bought a $2,000 TV on a credit card charging 15% interest over 2 years, you would end up paying a total of $2,327.28 for it. Oops.

Is time really equal to money? In this case it is. The earlier you start saving money, the more it can grow. If you are a parent, this is one of the most important financial lessons you can your child.

Are you wondering if you can really afford to save money? I ask, "How can you not?" I like to have people go through a cash flow analysis to look for money they can reallocate to savings. You can access our cash flow analysis form by clicking here.