Don't Miss These Critical Retirement Deadlines

by Robert Powell

If you are like most people, you probably own a few IRAs, a 401(k), and a Roth IRA.  And, if you are like most people you might have a wee bit of trouble keeping track of all the key dates associated with those and other retirement accounts.

Yes, Uncle Sam didn’t make it easy on those of you saving for and living in retirement. “IRAs have numerous deadlines that people need to be aware of,” said Jeffrey Levine, an IRA technical consultant with Ed Slott and Co. “Most of the time, missing a key deadline is an irrevocable and irreparable mistake. Even in the rare cases when a deadline mistake can be fixed, the solution tends to be costly and time consuming.”

Thankfully, however, there are plenty of folks, including Levine, who know the key dates for you to put on the calendar now—before the rest of the year gets away from you. (In other words, enjoy the rest of summer)

Sept. 30

Anyone who is inheriting an IRA from someone who died in 2011 should pay close attention to the Sept. 30, 2012 “cash out” date, said Levine. This is the last day to pay off—cash out—a beneficiary of an account so that they will not be considered when calculating required minimum distributions or RMDs from an inherited IRA.

Yes, Sept. 30 is the deadline by which certain beneficiaries must be removed from inherited IRAs, according to Denise Appleby, editor of IRA News, Views, and Tips.

“Generally, if you are one of multiple beneficiaries, you are required to use the life-expectancy of the oldest beneficiary in the group to calculate your RMD amounts,” Appleby said. “If you are one of the younger beneficiaries, using the life-expectancy of the oldest beneficiary can reduce the amount of time over which you have to distribute your inherited IRA, and can negatively impact income tax and tax planning opportunities.”

This issue is compounded if one of the many beneficiaries is what’s called a “nonperson” such as a charity or an estate. That might require the amount to be distributed over an even shorter period, said Appleby.

So, if the IRA owner died in 2011, you can avoid this problem by removing older and nonperson beneficiaries by Sept. 30 of this year, said Appleby. Of note, she said, this removal process requires older and nonperson beneficiaries to take full distributions of their amounts by Sept. 30, 2012, or the older beneficiaries to properly disclaim their portion by Sept. 30, 2012.

Levine offered this example: Let’s say a 65-year old died in 2011 and leaves their IRA 50/50 to their only child and the Red Cross, a charity. Since the Red Cross is not a designated beneficiary, if they were not cashed out by Sept. 30, 2012, the entire inherited IRA might have to be withdrawn within five years. On the other hand, if the Red Cross received their entire share of the inherited IRA and were cashed out, the child would be able to use his/her remaining life expectancy (as determined by IRS tables) to calculate their inherited IRA RMDs, allowing for increased tax-deferral and minimizing Uncle Sam’s bite.

FYI: You’ll get a second chance if you miss this deadline. “For older beneficiaries who are not removed by Sept. 30, 2012, segregating their share into separate accounts by Dec. 31, 2012 will still allow younger beneficiaries to use their own life expectancies, as long as there is no nonperson beneficiary remaining after Sept. 30,” Appleby said.

Oct. 1

For those with SIMPLE IRAs, the October-November time frame is crucial—both for purposes of establishing a new plan and for employer notifications, said Ben Norquist, the president and CEO of Convergent Retirement Plan Solutions. Most types of employer-sponsored plans can be set up at any time during the year, but an employer must typically establish a SIMPLE IRA by no later than Oct. 1.

Of course, there’s an exception for businesses that come into existence after Oct. 1. “In such cases, the plan must be established as a soon as administratively feasible,” said Appleby.

For both new and existing SIMPLE IRA plans, Norquist said the employer must meet two specific notification requirements at least 60 days before the beginning of the new plan year. “One notice requirement is a deferral notice alerting eligible participants that they may defer, the method and parameters for making a deferral election, and whether or not employees have the right to select an alternative IRA trustee/custodian to receive their SIMPLE IRA deferrals,” he said.

“The second notice required, at least 60 days before start of new year, is for the employer to notify all eligible employees of the employer’s contribution for the coming year—a 3% match, 2% ‘nonelective,’ or—potentially—a reduced match,” Norquist said.

Oct. 15

For those who have done a Roth IRA conversion, Oct. 15 is the last date for recharacterizing a 2011 Roth conversion, said Norquist.

According to Appleby, if you converted an amount from another retirement account to a Roth IRA during 2011, and you want to reverse or recharacterize that conversion, you have until your 2011 tax filing deadline to do so.

So, if you filed your 2011 tax return or filed for an extension by the due date, which is usually April 15, you receive an automatic six-month extension to complete the recharacterization. For calendar year filers, the automatic six-month extension ends on Oct. 15, Appleby said.

“The recharacterization provision is one of the biggest benefits in the entire Tax Code, allowing someone to completely undo a Roth conversion, for any reason, and get back the taxes that were paid,” said Levine. “Anyone who made a 2011 conversion should make sure to review it as we near the deadline to see if the conversion is still the right move for them.”

If, for some reason, their account value has dropped significantly since they made the conversion, a recharacterization would almost certainly make sense, because taxes would have been paid on value that no longer exists, said Levine.

And, if the Roth IRA is still what’s best for that person, Levine said the recharacterized funds could be reconverted to a Roth IRA after 30 days. “By this point, the taxes have likely been paid on any 2011 conversion and a tax return may have been filed,” he said. “If so, an amended return would be needed to get back the taxes already paid.”

Oct. 15 is also the deadline to remove 2011 IRA excess contributions, said Appleby. “If you contributed more than is allowed to your IRA for 2011, you will owe the IRS an excise tax of 6% of the excess amount, unless you correct it by your 2011 tax filing deadline.,” said Appleby. Similar to the deadline for completing recharacterizations of Roth conversions, if you filed your 2011 tax return or filed for an extension by the due date (which is usually April 15), you receive an automatic six-month extension to correct the excess IRA contribution.

Dec. 31

The big dates for IRAs are primarily Dec. 31, which is the Required Minimum Distribution (RMD) deadline for those over age 70½, as well as for IRA beneficiaries of deceased IRA holders, and April 1, 2013, which is the required beginning date for those who turned 70½ in 2012, said Norquist.

For those are concerned about the expiring President Bush-era tax cuts, Dec. 31 is also the last date for making a Roth conversion that would be includable in 2012 taxable income, said Norquist.

For those who have a solo 401(k) or what’s also called an individual(k), the employer must establish the plan by no later than last day of business’s 2012 tax year to be eligible to make deductible contributions for 2012, said Norquist.

“Different providers interpret this requirement in different ways,” said Norquist. For example, if the plan documents were signed by business owner on Dec. 31, but not received by provider until sometime in January it could be a problem. “So, it is important to plan ahead—especially for those self-employed individuals who are thinking about setting up an Individual 401(k) plan for the first time,” said Norquist.

A SEP IRA, by contrast, can be established all the way up until the employer’s tax return due date—including extensions, said Norquist.

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