A Trap No. 1: Acronyms
Acronyms generally help us com- municate quickly and efficiently. But if you don’t understand what one really means, it could be a problem. For example, while laypersons use the term “IRA” to mean Individual Retirement Account, to the IRS it stands for Individual Retirement Ar- rangement. Regardless of how many individual accounts you designated as IRAs, you only have one arrange- ment. The first trap now is set.
s a child, I loved watching
Saturday morning cartoons, especially those with Wile E. Coyote and the Road Runner. I appreciated the intricate yet ludicrous contraptions the coy- ote would assemble to catch his foe. Of course, he never succeeded — and
most of the time the fleet-footed bird was com- pletely unaware of the attempts to entrap him.
Unfortunately, the same isn’t true when it comes to you and the IRS. If you aren’t aware of its tax traps, there’s a good chance you’ll get caught.
The Internal Revenue Code (IRC)
says you can make one 60-day roll- over from your IRA in any 12-month period. (This is when you withdraw funds from a retirement account and redeposit them into another one within 60 days.) If you assume the “A” in IRA stands for “account,” you might think that because you have several accounts, you can do a 60-day rollover from each one. Wrong. The first 60-day rollover is the only one allowed for your retirement arrange- ment. Any other rollovers occurring within the next 12 months are deemed as distributions and subject to income tax — and, for those younger than 59½ years old, a 10-percent penalty.
Another thing to watch for re-
garding IRA rollovers: If you inherit a retirement account from someone other than your spouse, you can never perform a 60-day rollover. If you attempt one, when you take the funds out of the inherited account, it will be designated as a distribution. You’ll owe taxes on the distribution, but you won’t owe penalties, as they don’t apply to inherited IRAs. You can avoid this issue com- pletely if you perform what is called a “trustee-to-trustee” transfer, where you don’t ever actually possess the funds. You can complete as many of these transfers as you like.
Trap No. 2: Income limits
Many officers are vulnerable to this trap the year they leave the service or the year after. The IRC contains many income limits on deductions and cred- its. Most of the limits are above the income of active duty military officers. However, that is not always true after retirement or transition. One that seems particularly prob- lematic is the income limit on Roth IRA contributions. For 2017, the abil- ity to contribute to a Roth IRA for those who file “married-filing-jointly” is phased out between $186,000- $196,000 of adjusted gross income
60 MILITARY OFFICER FEBRUARY 2017
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