IRAs And Other Plans
In the discussion below, the term IRA is used for both IRA and 401(k) accounts, since in Forecaster4 they are treated the same. A 457-retirement plan operates similarly to a 401(k) plan, but there is no 10% penalty for withdrawal before the age of 59 1/2.
Click the option button that identifies the type of retirement plan you are specifying with this data entry form.
IRA Accounts Funded With After-Tax Contributions (IRAs With Cost Basis)
You can specify that traditional IRA accounts have a cost basis that has been established by after-tax contributions. Future distributions of the cost basis amount are both tax-free and penalty-free. Deposit instructions for IRA accounts can be specified as an after-tax contribution so as to increase (or create) a cost basis.
If any one of your traditional IRA accounts has a cost basis, then when money is taken from an IRA, part of the distribution will be taxed and part won't regardless of which traditional IRA is used for the withdrawal. In determining those amounts, the IRS requires that all traditional IRAs be treated as one common IRA for making the appropriate computations for the taxable and untaxed portions of the distribution. For this reason, there is no need to maintain separate IRAs for deductible and nondeductible contributions to a traditional IRA.
The Forecaster4 program combines all the cost basis amounts and all the balance amounts for all traditional IRAs owned by the same person when taking money from any traditional IRA. Then the ratio of total cost basis to total balance is used to prorate the amount subject to taxes.
Deposit instructions for traditional IRA accounts can be specified as an after-tax contribution so as to increase (or create) a cost basis.
Early Distributions From IRAs With Penalty Tax
If no money are available in other Forecaster4 accounts, and the money is needed to makeup a shortfall in funding the total retirement living expense amount, the Forecaster4 program will withdraw funds from an IRA before the owner is 59 1/2. This early distribution is subject to a penalty tax.
Early Distributions From 457 Plans Without Penalty Tax
If this account is a 457 plan, and this account is used in funding the retirement living expense amount before the owner is 59 1/2, the early distribution is done without a penalty tax.
Early Distributions From IRAs Without Penalty Tax
There are two ways to do early distributions from IRAs without penalty tax.
1): There is no penalty tax if the owner is totally and permanently disabled
2): You can specify a series of Substantially Equal Periodic Payments (SEPP) based on the amount in the account and your life expectancy.
A parameter in the Person definition data entry window can specify that a principal is totally and permanently disabled. This lets Forecaster4 distribute funds from the person's IRA before age 59 1/2, if the funds are needed for retirement income, without any penalty tax.
To handle penalty-free SEPP distributions from IRAs, a check box is available on "withdrawal" instructions and "transfer" instructions that are from IRA accounts. This gives you an option to define each specific distribution as one without penalty tax. In that way you can define your planned early distributions and have them done without a penalty tax calculation by the program. You have to specify each individual distribution and mark it as exempt from penalty tax. The Forecaster4 program does not verify the correctness of your specifications.
You can specify SEPP distributions based on the amount in the account and your life expectancy. This is called a Systematic Withdrawal Program (SWP). The IRS rules state the once you establish an early-distribution SWP schedule, you must stick to it for at least five years and until you are at least 59 1/2. You have to figure out your yearly distributions using the available tools and calculators (See http://www.dinkytown.net/java/Retire72T.html) and specify them individually year-by-year. The Forecaster4 program does not do this.
You can also specify a series of early IRA distribution instructions used for "qualified higher education expenses" for yourself, spouse, or your or your spouse's child or grandchild, which are exempt and are not penalized.
Also, an early IRA distribution by a qualified first-time homebuyer can escape the penalty, but is limited to distributions totaling $10,000 during an individual's lifetime.
The Forecaster4 program allows you to define these specific withdrawal and transfer instructions from IRA accounts to simulate early distributions that are penalty-free. You must define a separate instruction for each year's distribution. Each withdrawal or transfer instruction will specify the year of the distribution, the amount, and a period of one year. The check box labeled "Exempt From Penalty Tax" must be checked. If you use wrong dates or wrong amounts or wrong periods, there is no error message from the program.
Monies "transferred" from accounts are placed into the destination account, to be used according to the instructions for that destination account. Monies "withdrawn" from accounts are added directly to the collection of funds used to provide for the year's total retirement living expenses, thereby reducing the total needed to be acquired from any available account funds.
Remember: Any distributions prior to age 59 1/2 for educational or first-time home expenses, or under a SWP will always be subject to income tax under regular IRA tax rules, whether or not there is an early distribution penalty.
Roth IRAs
A Roth IRA account has different tax treatments than a traditional IRA account. Rollovers into a Roth from a traditional IRA incur tax liabilities. And all earnings in a Roth IRA are untaxed forever. But Roth IRAs are subject to the penalty tax for early withdrawal. The Forecaster4 program calculates these tax treatments when they occur.
Roth IRA accounts can be funded by taking a distribution from a traditional IRA and doing a conversion rollover to the Roth IRA. To model this transaction with Forecaster4, specify a transfer instruction from the traditional IRA with the Roth IRA as the destination. This IRA distribution can have tax consequences that you may want to handle with specific directions. To allow for this, the data entry editor for any transfer instruction from a traditional IRA includes a second screen where you can define tax handling parameters.
Tax Payments For IRA Distributions
When you create a transfer instruction for a traditional IRA account, it may be for a specific reason such as a Roth rollover conversion, or it may be a distribution for another reason. Unless the transfer is to another traditional IRA owned by the same person, there are tax consequences. The transfer instruction data entry wizard's second screen lets you specify the tax parameters.
The second screen lets you select a specific tax rate for the IRA distribution. The distribution may be for a large amount that will perhaps move you into a higher tax bracket than where you normally reside. In this case, the tax consequences for a large distribution might best be modeled using the marginal tax rate for the resulting bracket. This screen lets you specify that tax rate for specific use with this distribution.
This screen also lets you select the way you will pay the tax. You can pay from the distribution thereby reducing the amount actually transferred to the destination account. Or you can pay from another of your accounts, thereby delivering the entire transfer amount.
You can create a transfer instruction to obtain a distribution from an IRA account for any reason. It does not have to be for a Roth conversion rollover. Distributions can be done to any tax normal account. The tax consequences are the same as for a Roth conversion rollover. And the options for specifying the tax rate and payment option are still available on this screen.
You can convert traditional IRAs by transferring funds to a target Roth IRA. In other words, you make a rollover conversion to a Roth IRA. The rollover conversion is accomplished by specifying a transfer instruction from the traditional IRA to the Roth IRA. When the destination of the transfer is a Roth IRA, the transaction is treated as a rollover conversion by the Forecaster4 program. The Forecaster4 program figures out the tax that is due and can deduct it from one of your plan's accounts. This screen lets you select the tax rate and the way you will pay the tax.
If you are funding the Roth IRA by rolling over from a traditional IRA account that has a cost basis, then part of the roll-over will be taxed and part won't depending on the cost basis ratio as calculated over all of your traditional IRAs.
A video which shows the use of transfer instructions for IRA distributions is the one about Roth conversion rollovers, available here in the Knowledge Base list as Video Tutorials.