IRA BLOG
The Zombie Rule
By Andy Ives, CFP®, AIF®
IRA Analyst
This article is NOT about the “ghost rule” applicable to non-living beneficiaries. That payout rule applies when a non-person beneficiary (like an estate) inherits an IRA when the original owner died on or after his required beginning date (RBD). With the ghost rule, a non-person beneficiary is allowed to use the single life expectancy of the deceased individual to determine annual required minimum distributions (RMDs). As such, the name “ghost rule” seems wholly appropriate. (I most recently wrote about the ghost rule in the Slott Report on February 7, 2024, “Ghost vs. 5-Year: The Calendar Dictates.”)
No, this is something different. Since we are approaching Halloween, I thought I’d write about a unique beneficiary payout rule available to living, breathing people…one that has yet to be named. I hereby deem the following beneficiary option as…the “Zombie Rule.”
We know that the SECURE Act created five classes of eligible designated beneficiaries (EDBs). These include surviving spouses; minor children of the account owner; disabled individuals; chronically ill individuals; and individuals not more than 10 years younger than the IRA owner. (Those older than the IRA owner also qualify.) These EDBs are still permitted to take annual stretch RMDs over their own single life expectancy.
Spouse beneficiaries will typically do a spousal rollover into their own IRA, so we will disregard that EDB class. As for the next three EDB classes, more often than not they will be younger than the IRA owner when they inherit. (Obviously that is the case with minor children.)
But that final class of EDBs – individuals not more than 10 years younger than the IRA owner – is interesting. ANY beneficiary who is OLDER than the deceased IRA owner qualifies as an EDB under this classification. As an older EDB, that living, breathing person can choose which single life expectancy to use for calculating annual RMDs – their own age, or that of the deceased individual. Since the living, breathing beneficiary can inhabit the deceased person’s single life expectancy space, we have the Zombie Rule!
Example:
Ichabod dies at age 75, which is after his RBD. Ichabod’s beneficiary is his older sister Salem, age 80. Since Salem is not more than 10 years younger than Ichabod (she is older), she qualifies as an EDB and can stretch RMD payments. Since Ichabod died AFTER his RBD and Salem is older than Ichabod, Salem is permitted to use Ichabod’s single life expectancy to calculate her RMDs. Ichabod’s life expectancy in the year OF his death is 14.8 for a 75-year-old. For subsequent years, Salem subtracts 1 each year (starting with 13.8 for her first RMD calculation). As such, the inherited IRA should last for 14 years until Salem is 94.
By leveraging the Zombie Rule, Salem can minimize her RMDs and extend the period for which she must take distributions, thereby spreading the total taxes due over a longer time horizon. (While 94 may seem old to be taking inherited IRA RMDs…that witch may live to be 300!)
https://irahelp.com/slottreport/the-zombie-rule/
Higher Catch-Up Contributions Available for Certain Older Employees Starting in 2025
By Ian Berger, JD
IRA Analyst
The year is flying by, and before we know it 2025 will be here. With the arrival of the new year, several new provisions from the 2022 SECURE 2.0 law that impact retirement plans will become effective. One of the changes allows certain older participants in company savings plans and SIMPLE IRAs to make higher catch-up contributions.
401(k), 403(b) and Governmental 457(b) Plans
Under current law, employees in 401(k) plans (and 403(b) and governmental 457(b) plans) who attain age 50 by the end of a year can make salary deferrals in excess of the regular deferral limit. For example, in 2024, participants aged 50 or over can make an additional $7,500 on top of the regular $23,000 limit – for a total of $30,500. Starting in 2025, employees who turn 60, 61, 62 or 63 by the end of a year will be able to make even higher catch-up contributions for that year. So, for example, as long as you reach 60 by December 31, 2025, you’re eligible for the extra catch-up for that year – even if you’re only 59 when you make those deferrals.
How much is this special catch-up for 2025? Unfortunately, that’s not crystal clear. SECURE 2.0 says it’s the greater of $10,000 or 150% of the 2024 regular catch-up limit. The 2024 catch-up limit is $7,500, and 150% of that amount is $11,250. So, it would seem the 2025 special catch-up should be $11,250. But the Congressional summary of SECURE 2.0 suggests that Congress actually intended the 2025 special catch-up to be the greater of $10,000 or 150% of the 2025 regular catch-up limit. A draft bill in Congress, which hasn’t yet been introduced, would fix this error and several other SECURE 2.0 glitches. In any case, we know the 2025 catch-up for ages 60-63 will be at least $11,250.
Whatever the special catch-up for 2025 ends up being, it will be indexed for inflation starting in 2026.
SIMPLE IRAs
The higher catch-up also will be available starting in 2025 for SIMPLE IRA participants turning 60, 61, 62 or 63 by the end of the year. (The 2024 regular deferral limit is $16,000, and the age 50-or-older catch-up is $3,500 – for a total of $19,500). SECURE 2.0 is clear that the 2025 special catch-up is the greater of $5,000 or 150% of the 2025 regular catch-up limit. We won’t know the 2025 regular catch-up limit until the IRS announces all of the 2025 retirement dollar limits in a few weeks. However, the 2025 regular catch-up limit will certainly be the same as, or higher than, the 2024 $3,500 regular catch-up limit. So, the 2025 special catch-up will be at least $5,250 (150% x $3,500). Again, that amount will be adjusted for inflation starting in 2026.
Keep in mind that plans and SIMPLE IRAs don’t have to offer age 50-or-older catch-ups at all. If yours doesn’t – then the new special catch-up for ages 60-63 won’t be available.
https://irahelp.com/slottreport/higher-catch-up-contributions-available-for-certain-older-employees-starting-in-2025/
QTIP Trusts and Successor Beneficiaries: Today’s Slott Report Mailbag
Ian Berger, JD
IRA Analyst
Question:
We have a client who has children from a previous marriage. Upon the husband’s death, he wants to make sure his current spouse has access to income from his IRA. But he also wants to make sure the remaining balance, when she passes, goes to his children from his first marriage and not to someone else, e.g., her children.
How best to make sure that happens?
Answer:
We do not normally recommend that a trust be named as IRA beneficiary, but this is one situation where naming a trust makes sense. The trust you would use is called a “QTIP” (qualified terminable interest property) trust. This is a special trust that is created to qualify for the estate tax marital deduction while giving the IRA owner (the trust creator) control over the trust principal (the IRA) after his death and after the death of the spouse. But QTIP trusts must also satisfy the IRA beneficiary distribution rules, and that can be difficult. For this reason, you should work with a estate attorney who is familiar with those rules.
To avoid the complications of a QTIP trust, another strategy you may consider is simply splitting the IRA. The client could decide how much he would like his wife to have and set up a separate IRA with her as beneficiary. The remainder could be left in the IRA with his children from his prior marriage as beneficiaries.
Question:
Hello, I attended the IRA workshop at National Harbor in July. I’ve searched through my materials, but I’m still confused about this situation.
My client has recently inherited an inherited IRA. Dad passed away a couple of months ago and he had an IRA that he inherited from his aunt (post 2020). The aunt was already taking RMDs. Dad was using the 10-year rule.
What are the minimum requirements for Dad’s 32 year-old daughter that just inherited this account?
Thank you much!!
Ricky
Answer:
Hi Ricky,
Your client (the daughter) is a successor beneficiary – the beneficiary of a beneficiary. All successor beneficiaries are subject to the 10-year payment rule. If, as in this case, the original beneficiary (Dad) was himself subject to the 10-year rule, the successor must empty the inherited account by the end of the original beneficiary’s 10-year period. In other words, the successor cannot tack on a new 10-year term of her own. Starting in 2025, the daughter must also receive annual required minimum distributions (RMDs) during those remaining years – based on Dad’s single life expectancy.
https://irahelp.com/slottreport/qtip-trusts-and-successor-beneficiaries-todays-slott-report-mailbag/
You Missed the October 15 Deadline to Correct an Excess IRA Contribution – Now What?
By Sarah Brenner, JD
Director of Retirement Education
October 15, 2024 has come and gone. This was the deadline for correcting 2023 excess IRA contributions without penalty. If you missed this opportunity, you may be wondering what your next steps should be. All is not lost! While you may not have avoided the excess contribution penalty for this year, you can still correct the issue for future years.
Excess IRA Contributions
Maybe your income ended up being higher than expected and you were ultimately ineligible for the Roth IRA contribution you made. Maybe you did not have earned income and contributed to an IRA anyway. Excess IRA contributions can happen in all sorts of ways. The cutoff for removing an excess IRA contribution for 2023 without penalty was October 15, 2024.
Two Options for a Fix After the Deadline
Regardless of the reason, if there is an excess IRA contribution it can still be corrected after the deadline. One way to fix the problem is to withdraw the contribution from the IRA. The good news is that only the excess contribution amount needs to be withdrawn. When correcting an excess before the October 15 deadline, any net income attributable (NIA) must also be withdrawn. However, in an odd tax code anomaly, since we are after the deadline, the NIA to the excess contribution can remain in the traditional or Roth IRA.
The bad news is that there will be a 6% excess contribution penalty, and IRS Form 5329 will need to be filed to pay it. Fixing the excess contribution is still the smart thing to do because if the excess contribution is not fixed – the 6% penalty will continue to accrue each year until either the excess is corrected, or time runs out under the new SECURE 2.0 statute of limitations (six years).
Besides withdrawal, there is another option to correct excess IRA contributions after the deadline. You can elect to carry forward the excess and apply the overage to future years. To use this method of correction, you must be eligible to make the contribution in the future year(s), and the 6% penalty must be paid each year until the original excess contribution amount is used up or the statute of limitations runs out.
https://irahelp.com/slottreport/you-missed-the-october-15-deadline-to-correct-an-excess-ira-contribution-now-what/
Nuances of NUA
We have written about the net unrealized appreciation (NUA) tax strategy many times. Generally, after a lump sum distribution from the plan, the NUA tactic enables an eligible person to pay long term capital gains (LTCG) tax on the growth of company stock that occurred while the stock was in the plan. But there are finer points to NUA. Here are some more nuanced details:
Step-Up in Basis. NUA (meaning the appreciation that occurred in the plan prior to the lump sum distribution) never receives a step-up in basis. If the company stock is still held by the former plan participant upon his death, the beneficiary of that account will pay LTCG tax on the NUA no matter when the shares are sold. But what about any appreciation of the stock AFTER it was distributed from the plan? Appreciation after the lump sum plan distribution DOES receive a step-up in basis.
Example: John completed a proper NUA distribution 10 years ago of his company stock that was valued at $500,000. At that time, John paid ordinary income tax on the cost basis of his shares ($100,000) and he anticipated paying LTCG tax on the NUA of $400,000 when he sold the shares. John held all the shares until his death, when the total value had increased to $750,000. John’s beneficiary (his daughter Susan) immediately sells the shares. She will pay LTCG tax on the $400,000 of NUA. However, Susan will get a step-up in basis on the $250,000 of additional appreciation and owe no tax on that part of the transaction. (The original $100,000 is also tax-free as a return of basis.)
“Specific Identification Method.” Retirement plans will typically use an “average cost per share” to determine the NUA. Over the years, as the company stock price goes up and down, a plan participant will acquire shares at different price points with each salary deferral. However, the plan may not track all these different purchase prices. Instead, the plan could use the total purchase amount (the cost basis) vs. the current value of the stock. For example, if the current value of the stock within a 401(k) is $1,000,000, and if the total amount used to purchase the stock was $400,000, the NUA is $600,000. Average cost per share is cost basis ($400,000) divided by the total number of shares owned within the plan.
If a plan participant maintains detailed records and documents the specific historical stock purchase prices, the person could decide to only include the low-cost-basis shares in an NUA transaction. The high-cost-basis shares would be rolled to an IRA and excluded from the NUA calculation. By following the “specific identification method” and targeting the low-basis shares, a person could further maximize the NUA tax strategy.
In-Plan Roth Conversions: Caution! When an NUA “trigger” is hit, a plan participant does NOT have to act immediately on an NUA distribution. However, if the trigger is “activated” by certain transactions – like a normal distribution – the NUA lump sum withdrawal must occur within that same calendar year. If not, the trigger will be lost. Be careful! An in-plan Roth conversion is considered a distribution and WILL activate an NUA trigger.
10% Penalty for Those Under 55 Years Old. Assume a plan participant was under 55 at the time of separation of service. As such, she could not leverage the age-55 exception to avoid a 10% early withdrawal penalty. But there is a silver NUA lining. If she pursued an NUA transaction before age 59 ½ (and rolled over her non-stock plan funds), she would owe a 10% penalty ONLY ON THE COST BASIS of shares. If the appreciation is high enough, it could be advantageous to pay the 10% penalty on the cost basis to preserve the LTCG tax break on the NUA.
The NUA tax strategy is part art and part science. To maximize the benefits, understanding the different nuances is essential.
https://irahelp.com/slottreport/nuances-of-nua/
The 10-Year Rule and Required Minimum Distributions: Today’s Slott Report Mailbag
By Andy Ives, CFP®, AIF®
IRA Analyst
QUESTION:
Good afternoon,
If a client passed this year with four adult children inheriting equally, and each beneficiary is using the 10-year rule, how do they determine yearly required minimum distribution (RMD) calculations? Is it based on life expectancy or on a number that will empty the IRA within the 10 years?
Thank you for your help.
Sherry
ANSWER:
Sherry,
When RMDs apply within the 10-year period (and assuming the four inherited IRAs are properly established), each beneficiary will use his own age to determine the appropriate RMD. Use the beneficiary’s age in the year AFTER the year of death (2025) to determine the initial factor from the IRS Single Life Expectancy Table. Then, subtract 1 from that factor for years 2 – 9 of the 10 years, and deplete the entire account by the end of year 10 (12/31/34). A beneficiary can always take more than the RMD, which could be a wise tax-planning decision.
QUESTION:
My wife’s mom, age 96, died in June and still has about $6,000 in IRA assets. She had been taking required minimum distributions (RMDs). Do we need to take an RMD for her in 2024, or can the remaining funds pass to her beneficiaries?
Thanks,
Michael
ANSWER:
Michael,
All (or whatever portion remains) of your mother-in-law’s year-of-death RMD becomes the responsibility of the beneficiaries. To avoid a late penalty, Mom’s final RMD must be taken by December 31 of the year AFTER the year of death (12/31/25) – this is the new extended deadline. To help streamline tax reporting, a custodian will typically establish an inherited IRA for the beneficiary and pay the year-of-death RMD from that inherited account. Note that if there are multiple beneficiaries, the year-of-death RMD does not need to be spread equally among them. As long as the full amount is taken, the IRS will be satisfied.
https://irahelp.com/slottreport/the-10-year-rule-and-required-minimum-distributions-todays-slott-report-mailbag/
Tax Filing Relief and Retirement Account Withdrawal Options for Hurricane Victims
By Ian Berger, JD
IRA Analyst
Victims of Hurricane Helene have at least a glimmer of good news when it comes to their tax filings and ability to withdraw from their retirement accounts for disaster-related expenses.
The IRS usually postpones certain tax deadlines for individuals affected by federally-declared disaster areas. On October 1, the IRS announced disaster tax relief for all individuals and businesses affected by Hurricane Helene, including the entire states of Alabama, Georgia, North Carolina and South Carolina and parts of Florida, Tennessee and Virginia. Generally, the IRS extended the deadline to file certain individual and business tax returns and make tax payments until May 1, 2025. It is likely the IRS will provide similar relief for victims of Hurricane Milton.
Meanwhile, as a result of SECURE 2.0, victims of federally declared-disasters (such as Hurricanes Helene and Milton) can withdraw up to $22,000 from their IRAs. If you are under age 59 ½, you won’t have to pay a 10% early distribution penalty on these withdrawals. Further, the taxable income on these withdrawals can be spread over three years, and the funds can be repaid over three years. Your employer plan may also allow these withdrawals. Even if your plan doesn’t allow disaster-relief withdrawals, you may be able to treat a hardship withdrawal (see the last paragraph of this article) as a disaster-relief withdrawal on your federal tax return – this would allow you to avoid the 10% penalty, spread income over three years and repay the withdrawal.
SECURE 2.0 also allows you to pay back a withdrawal you made prior to a disaster that you intended to use to purchase or construct a home if you are unable to use the funds because of the disaster. Finally, if you have a company plan that allows for loans, the plan can allow you to borrow a larger amount and give you additional time to repay outstanding loans.
You may also take penalty-free withdrawals from your IRA for “unforeseeable or immediate financial needs relating to personal or family emergencies.” Your employer plan may also allow emergency distributions. These withdrawals are limited to one per calendar year and are limited to $1,000. Once an emergency withdrawal is taken, no other emergency withdrawal can be taken in the following three years unless the original distribution is repaid or future salary deferrals (for plans) or contributions (for IRAs) exceed the amount of the original distribution.
Finally, if your plan allows, you may be able to take a hardship withdrawal from your account. The withdrawal must be for an “immediate and heavy financial need.” Most plans allow employees to automatically satisfy this requirement if their expense fits into one of seven “safe harbor” categories. One of those categories is disaster-related expenses and losses. There is no dollar limit on hardship withdrawals, but withdrawing pre-tax funds subjects you to tax and the 10% penalty if you are under 59 ½.
https://irahelp.com/slottreport/tax-filing-relief-and-retirement-account-withdrawal-options-for-hurricane-victims/
Final Regulations Allow Separate Accounting for Trusts
Sarah Brenner, JD
Director of Retirement Education
The recent final required minimum distribution (RMD) regulations include a new rule change that may be beneficial for IRA owners who name trusts as beneficiaries. In the new regulations, the IRS allows separate accounting for RMD purposes for more trusts. This can be helpful when a trust has beneficiaries who can potentially have different payout periods under the RMD rules.
Separate Accounting
When an IRA with multiple beneficiaries is split into separate inherited accounts for each beneficiary by December 31 of the year following the year of death, this is considered “separate accounting.” The RMD rules will then apply separately to each inherited IRA. For example, one beneficiary might be eligible to use a life expectancy payout on their inherited IRA while another would be required to use the 10-year rule. Without separate accounting – all of the beneficiaries would have to use the fastest payout method.
In the past, while separate accounting was allowed for multiple beneficiaries named directly on an IRA, it was never permitted for trusts. In many private letter rulings, when a single trust was named as the beneficiary and that trust was to split into three separate sub-trusts, the IRS allowed separate inherited IRAs to be created, one for each sub-trust, but did not allow separate account treatment for RMD purposes. To get around this issue, IRA owners could name separate trusts directly on the beneficiary form. In these situations, the IRS allowed the beneficiaries of sub-trusts to each use their own life expectancy. The difference was that each sub-trust was named as the beneficiary on the IRA beneficiary form, rather than the master trust.
The SECURE Act changed these rules in a limited way. It allowed separate accounting for certain special needs trusts called “applicable multi-beneficiary trusts.” While the SECURE Act limits most beneficiaries to a 10-year payout, special rules for these trusts for disabled or chronically ill beneficiaries allow RMDs to be paid from the IRA to the trust using the beneficiary’s single life expectancy, even if the trust has other beneficiaries who are not disabled or chronically ill.
New Rules
The final regulations expand this treatment beyond “applicable multi-beneficiary trusts” to permit separate accounting to be used for other see-through trusts – if certain requirements are met. Separate accounts may be used for “see-through” trusts if the terms of the trust provide that it is to be divided immediately upon the death of the account holder into separate shares for one or more trust beneficiaries.
To be considered “immediately divided upon death,” the following requirements must be met:
- the trust must be terminated;
- the separate interests of the trust beneficiaries must be held in separate trusts;
- and, there can be no discretion as to the extent to which the separate trusts will be entitled to receive post-death distributions.
In addition, the final regulations clarify that a trust will not fail the requirement to be “divided immediately upon death” if there are administrative delays, as long as any amounts received by the trust during the delay are allocated as if the trust had been divided on the date of the IRA owner’s death.
https://irahelp.com/slottreport/final-regulations-allow-separate-accounting-for-trusts/
Recharacterization Still Exists
By Andy Ives, CFP®, AIF®
IRA Analyst
When a traditional IRA owner wants to convert all or a portion of his account to a Roth IRA, he needs to think long and hard about the transaction. For example, some questions to consider:
1. When will this money be needed? Since the earnings on a conversion must remain untouched for 5 years AND the Roth IRA owner must be age 59 ½ before those earnings are tax-free, conversion is a long-term play.
2. What will future tax rates be? If they are anticipated to remain level or go up, then converting now could be a viable solution. But if rates are expected to go down, then it might be wise to reevaluate and possibly postpone a conversion.
3. Where will the money come from to pay the taxes on the conversion? It is often recommended that a person pay the taxes from another source, other than having taxes withheld from the IRA. This way the full amount can begin to grow tax-free.
Why are these foundational questions so important? Because there is no going back. As soon as you hit ENTER on your computer, or as soon as your financial advisor submits the transaction, the deed is done. It cannot be unwound. Recharacterization of a Roth conversion is off the table. (Congress did away with it back in 2018.) Whatever consequences that follow a conversion must be dealt with. Since a Roth conversion is such a major decision, and since conversions are so popular, the common advice is, “Be sure this is what you want to do, because recharacterization is no longer an option.”
This is 100% true – recharacterization is no longer allowed. That is, as it pertains to Roth conversions.
HOWEVER, recharacterization of a traditional IRA or Roth IRA CONTRIBUTION is still available. This is a common misunderstanding. Yes, an unwanted or ineligible contribution to one type of IRA can be recharacterized (changed) to another type of IRA. A traditional IRA contribution can be recharacterized to a Roth IRA, or vice versa. A contribution can be recharacterized for any reason as long as it can be a valid contribution to the other type of IRA.
Why would it be necessary to recharacterize a contribution? Maybe a person made a Roth IRA contribution, but then later in the year earned a big year-end bonus which pushed her over the Roth IRA phase-out limits ($230,000 – $240,000 for those married filing joint in 2024; $146,000 – $161,000 for single filers). Maybe a person made a traditional IRA contribution, but then learned that the contribution could not be deducted based on participation in a work plan.
Regardless of the reason, a traditional or Roth IRA contribution can still be recharacterized. But there is a deadline – October 15 of the year after the year for which the contribution is made. Beyond that drop-dead date, recharacterization is not available. Recognize that when processing a recharacterization, any earnings or losses applicable to the contribution must also be recharacterized. (For example, if you made a $5,000 contribution that was now worth $4,500, only $4,500 gets recharacterized.) Ultimately, it will be as if the original contribution was made to the proper IRA.
While the term “recharacterization” is often dismissed because it “does not exist anymore,” it is imperative to understand that recharacterization is alive and well…but only as it pertains to Roth or traditional IRA contributions.
https://irahelp.com/slottreport/recharacterization-still-exists/
Surprising News About the New Statute of Limitations for Missed RMDs and Excess IRA Contributions
By Ian Berger, JD
IRA Analyst
A big change made by the SECURE 2.0 Act of 2022 was adding a new statute of limitations (SOL) for the IRS to assess penalties for missed required minimum distributions (RMDs) and excess IRA contributions. On its face, it looks like the new SOL is 3 years for the missed RMD penalty and 6 years for the excess contribution penalty. But looks can be deceiving. In fact, for most of you, the new lookback period will be 6 years for both penalties.
The penalty for a missed RMD used to be 50% of the amount not taken. SECURE 2.0 reduced this penalty to 25%, and down to 10% if the missed RMD is timely corrected. This change was effective beginning in 2023. But the IRS can excuse this penalty if you ask for waiver. To do so, you must take the missed RMD and file Form 5329 with the IRS explaining that the RMD shortfall was due to reasonable error.
An excess IRA contribution is a contribution that exceeds the amount you can contribute to your IRA or Roth IRA in a year (e.g., making a Roth contribution when your income is too high or rolling over an RMD.) The penalty for an excess contribution is 6% for each year the excess amount stays in your account as of December 31. There is no penalty if you correct the excess contribution by October 15 of the year after the year for which you made it. The IRS cannot waive this penalty, unlike the penalty for a missed RMD.
Before 2022, most people had no SOL protection, and the IRS could go back indefinitely to assess both penalties. In SECURE 2.0, Congress tried to remedy this by providing new lookback periods for both penalties.
In a recent Tax Court decision, Couturier v. Commissioner, No. 19714-16; 162 T.C. No. 4, the Court ruled that the new 6-year SOL for the excess IRA contribution penalty is not retroactive. Although the Court didn’t address retroactivity of the 3-year missed RMD penalty SOL, the decision almost certainly applies to that penalty as well. This means there will continue to be no SOL protection for either penalty for years before 2022.
For 2022 and subsequent years, the lookback period for the missed RMD penalty for most of you is actually 6 years – not 3 years. The only way to keep a 3-year lookback period for any year is to file Form 5329 with the IRS each year indicating that no penalty is owed for that year and attach enough information to the form to show the IRS why you believed there was no missed RMD for that year. (This is sometimes called “zero-filing.”) But very few people will go to all the trouble to do this. Anyone who doesn’t will wind up with a 6-year lookback if the IRS hits them with a missed RMD penalty.
For 2022 and future years, the lookback period for the excess IRA contribution penalty starts out at 6 years. The only way to get that down to 3 years is to use the zero-filing strategy and provide the backup documentation showing why there was no excess contribution for that year. Once again, this is not something many people are willing to do.
The bottom line: Whether you miss an RMD or make an excess IRA contribution, if you don’t fix it the IRS will have 6 years to come after you.
https://irahelp.com/slottreport/surprising-news-about-the-new-statute-of-limitations-for-missed-rmds-and-excess-ira-contributions/
Eligible Designated Beneficiaries and Disclaimers: Today’s Slott Report Mailbag
Sarah Brenner, JD
Director of Retirement Education
Question:
When an IRA owner dies after their required beginning date, can an eligible designated beneficiary choose either the life expectancy option or the 10-year payout rule?
Answer:
If an IRA owner dies on or after their required beginning date, the 10-year rule is not an option for an eligible designated beneficiary (EDB). The 10-year rule (for an EDB) is only available when the IRA owner dies before the required beginning date. After the required beginning date, the eligible designated beneficiary would have to take distributions over life expectancy.
Question:
Can an IRA beneficiary do a “partial” disclaimer or is a full disclaimer required? Thanks.
Answer:
A beneficiary can disclaim all or part of an IRA that they inherit. A full disclaimer of all the inherited IRA assets is not required.
https://irahelp.com/slottreport/eligible-designated-beneficiaries-and-disclaimers-todays-slott-report-mailbag/
Recharacterization Deadline Approaches
By Sarah Brenner, JD
Director of Retirement Education
It happens. You have made a 2023 contribution to the wrong type of IRA. All is not lost. That contribution can be recharacterized. While recharacterization of Roth IRA conversions was eliminated by the Tax Cuts and Jobs Act, recharacterization of IRA contributions is still available and can be helpful in many situations you may find yourself in.
Maybe you contributed to a traditional IRA and later discovered the contribution was not deductible or maybe you contributed to a Roth IRA, not knowing that your income was above the limits for eligibility. You may recharacterize the nondeductible traditional IRA tax-year contribution to a Roth IRA and have tax-free instead of tax-deferred earnings if your income is within the Roth IRA contribution limits for the year. Or, if your Roth IRA contribution is an excess contribution because your income was too high, you may recharacterize that contribution to a traditional IRA because there are no income limits for traditional IRA contributions.
It’s still not too late to recharacterize your 2023 IRA contribution. The deadline for recharacterizing a 2023 tax year contribution is October 15, 2024 for taxpayers who timely file their 2023 federal income tax returns. This is true even if you do not have an extension. You may need to file an amended 2023 federal income tax return if you recharacterized after you have already filed.
If you decide that recharacterization is a good move for you, contact your IRA custodian. You will need to provide the custodian with some information to conduct the transaction such as the amount you would like to recharacterize and the date of the contribution. Most IRA custodians can provide you with form to collect all the necessary information to complete a recharacterization. The IRA custodian will then directly move the funds you choose to recharacterize, along with the earnings or loss attributable, from the first IRA to the second IRA. This is a tax-free transaction but both IRAs report the transactions to you and the IRS. You will receive a 2024 Form 1099-R from the first IRA and a 2024 Form 5498 from the second IRA.
https://irahelp.com/slottreport/recharacterization-deadline-approaches/
IRA Acronyms
By Andy Ives, CFP®, AIF®
IRA Analyst
When presenting a particular section of our training manual, I usually make the joke that, “if we were playing an acronym drinking game, we would all be on our way to a hangover.” The segment is titled: “Missed stretch IRA RMD by an EDB, when the IRA owner dies before the RBD.” This part of the manual discusses the automatic waiver of the missed RMD penalty in a certain situation, and the acronym soup is borderline comical. So that everyone knows which end is up, here is a spiked punch bowl of common retirement-account-related acronyms.
IRA: Individual retirement arrangement. (Not “account!”)
RMD: Required minimum distribution. Minimum amount that must be withdrawn from a retirement account each year after reaching a certain age.
RBD: Required beginning date (for starting RMDs). Generally, April 1 of the year after the year a person turns 73.
QLAC: Qualifying longevity annuity contract. An annuity whose value (up to $200,000) can be excluded from an IRA owner’s balance for RMD calculation purposes.
EDB: Eligible designated beneficiary. Category of beneficiary who may take stretch RMDs.
NEDB: Non eligible designated beneficiary. Category of beneficiary who gets the 10-year rule.
NDB: Non designated beneficiary. Category of beneficiary that includes “non-people,” like an estate or charity. Payout rules applicable to NEDBs are the 5-year rule or “ghost rule.”
ALAR: At least as rapidly. The rule dictating that when RMDs have begun, they must be continued by the beneficiary. ALAR is a function of frequency, not amount.
QCD: Qualified charitable distribution. A distribution from an IRA to a qualified charity, subject to an age requirement of 70 ½ or older.
CWA: Contemporaneous written acknowledgement. This is just a receipt for your QCD!
CGA: Charitable gift annuity. A one-time QCD of $53,000 (for 2024) can go to an entity like a CGA, CRAT (charitable remainder annuity trust), or CRUT (charitable remainder unitrust).
DAF: Donor advised fund. A QCD cannot be made to a DAF.
NUA: Net unrealized appreciation. Tax strategy used to pay long term capital gains on the appreciation of company stock. (Be sure to know all the NUA rules before proceeding.)
NIA: Net income attributable. The gain or loss on an excess IRA contribution.
QDRO: Qualified domestic relations order. Used to split a retirement plan after divorce.
SECURE Act: Setting Every Community Up for Retirement Enhancement Act.
I feel dizzy. Maybe I should go lie down and sleep it off.
https://irahelp.com/slottreport/ira-acronyms/
NEW SPOUSAL BENEFICIARY RULES AND EFFECTIVE DATE OF 10-YEAR RULE: TODAY’S SLOTT REPORT MAILBAG
By Ian Berger, JD
IRA Analyst
Question:
I inherited an IRA from a younger deceased spouse who wasn’t required to take required minimum distributions (RMDs) until this year. Can I take advantage of the new section 327 rules under SECURE 2.0 since the RMDs haven’t commenced yet?
Answer:
Yes. The recently-released IRS proposed RMD regulations say that section 327 can be used by a surviving spouse who inherits before 2024 as long as the deceased IRA owner would have reached age 73 (the current first year for RMDs) in 2024 or later. The advantage of section 327 is that you can remain an IRA beneficiary (as opposed to doing a spousal rollover) and use the IRS Uniform Lifetime Table (and your age) to calculate RMDs. This will produce smaller RMDs than if you were using the IRS Single Life Table, which was required before section 327. An added benefit of being a spouse beneficiary is that these RMDs will not start until the deceased spouse would have been age 73. (As an alternative, you could elect to have the inherited IRA emptied by the end of the 10th year following the year your spouse died. No annual RMDs would be required in years 1-9.)
Question:
My father passed away in March of 2018 and I inherited his 401(k). I rolled over the 401(k) to an inherited IRA. Do I have to liquidate this IRA by the end of 2028?
Thank you.
Rick
Answer:
Hi Rick,
No. The 10-year payment rule for inherited IRAs applies to most non-spouse beneficiaries (including adult children) of IRA owners who die after 2019. Since your father died in 2018, you aren’t subject to the 10-year rule. You can continue taking annual RMDs over your single life expectancy.
https://irahelp.com/slottreport/new-spousal-beneficiary-rules-and-effective-date-of-10-year-rule-todays-slott-report-mailbag/
What’s the First RMD Year for Those Born in 1959?
By Ian Berger, JD
IRA Analyst
If you were born in 1959, what is the first year that you must start taking required minimum distributions (RMDs)? That would seem like an easy question to answer, but because of a snafu by Congress, it isn’t quite so clear.
For many years, RMDs started at age 70 ½. Then, in the 2019 SECURE Act, Congress postponed the RMD age to 72 for people born on or after July 1, 1949. In the 2022 SECURE 2.0 Act, Congress delayed the first RMD year even further with the following language:
- The first RMD age is 73 for those born on or after January 1, 1951 and before January 1, 1960; and
- The first RMD age is 75 for those born on or after January 1, 1959.
It didn’t long for commentators to notice a drafting error in this rule. The glitch caused anyone born in 1959 to have two first RMD ages.
Example: Jason Alexander, who played George in Seinfeld,was born on September 23, 1959. Jason is covered by the first part of the rule, which would make 73 his first RMD age. But he is also covered by the second part, which would also make 75 his first RMD age.
Obviously, even George cannot have two RMD ages, so this error had to be fixed. Back in May 2023, four high-ranking members of Congress from both parties sent a letter to the IRS promising they would introduce legislation to correct this mistake and several others in SECURE 2.0.
But guess what? This promised corrective legislation hasn’t happened yet. So, the IRS stepped into the breach and decided it would fix the 1959 “ambiguity.” In the proposed RMD regulations issued on July 18, 2024, the IRS said the SECURE 2.0 rule should work as follows:
- The first RMD age is 73 for those born on or after January 1, 1951 and before January 1, 1960; and
- The first RMD age is 75 for those born on or after
January 1, 1959January 1, 1960.
With this fix, those born in 1959 would only have one RMD age: 73. And the RMD ages would be as follows:
Age 70 ½ Born before July 1, 1949 |
Age 72 Born on or after July 1, 1949 and before January 1, 1951 |
Age 73 Born on or after January 1, 1951 and before January 1, 1960 |
Age 75 Born on or after January 1, 1960 |
However, it’s not entirely clear whether the IRS has the authority to make this correction. Earlier this year, the U.S. Supreme Court issued the Loper Bright Enterprises v. Raimondo decision, which gives judges more power to overturn IRS (and other governmental) regulations. Based on that decision, it is possible a judge could decide that only Congress has the power to fix its own mistake.
But for now, your best bet is to follow the RMD chart above.
https://irahelp.com/slottreport/whats-the-first-rmd-year-for-those-born-in-1959/
What You Need to Know About Withholding and Your IRA
By Sarah Brenner, JD
Director of Retirement Education
If you take a distribution from your traditional IRA, in most cases you will owe taxes. The government wants to be sure those taxes are paid, so IRA distributions are subject to federal income tax withholding. The good news is that there is a lot of flexibility when it comes to withholding on your IRA distribution. Here is what you need to know.
How Withholding Works
Your IRA custodian is required to apply federal income tax withholding rules to a traditional IRA distribution when more than $200 is distributed from your IRA in a year. Roth IRA distributions generally are not subject to withholding. When you take a distribution from your IRA, the custodian must provide you with a withholding notice explaining the rules prior to the distribution.
Unless your IRA distribution is from an IRA annuity that has been annuitized, your withholding choices are to withhold 0%, 10%, or more than 10%. You can even choose to have 100% of your IRA distribution withheld! If you don’t choose, the choice will be made for you. If you don’t choose anything after being notified, the custodian must withhold 10%. You should be aware that the 10% rule even applies to distributions that are converted to Roth IRAs. Be sure to elect 0% withholding if you want to convert an entire traditional IRA distribution to a Roth IRA. If any amounts are withheld, they will not be considered to be converted to the Roth IRA.
Withholding applies differently to annuitized distributions from an IRA. For these distributions, withholding applies as if the payments were wages. You can elect out of withholding on distributions from your annuitized IRA.
How Much Should I Withhold?
Your IRA custodian is required to inform you about withholding, but the custodian isn’t required to tell you how much you should actually withhold. How much should be withheld from your IRA distribution is based on your overall tax situation. You should consider a number of factors, such as total anticipated income, deductions, credits and other withholdings.
You may be subject to penalties for not paying enough federal income tax during the year, either through withholding or estimated tax payments. Withholding is automatically treated as being paid in ratably, throughout the year. This can be a benefit for you if you take an IRA distribution late in the year and are concerned that you may not have made high enough quarterly payments. You can choose to withhold on the IRA distribution to make up the shortfall.
Some taxpayers mistakenly equate their withholding with the tax they owe, but that, of course, is not usually the case. For example, if you withhold 10% from your IRA distribution, that doesn’t necessarily mean you’ll owe 10% in taxes. You could owe 10%, but you could also owe less than 10% or, most likely more than 10% – potentially much more. For 2024, the federal 10% tax bracket only applies to taxable income from $0 to $11,600 for single filers and $0 to $23,200 for those married and filing joint returns. Therefore, withholding only 10% of an IRA distribution for federal income taxes could easily result in you owing additional amounts at tax time.
Withholding can be complicated. You will want to keep in mind that federal withholding is only part of the picture. Many states also require withholding on IRA distributions. If you have questions, you will want to discuss your situation with a knowledgeable financial advisor.
https://irahelp.com/slottreport/what-you-need-to-know-about-withholding-and-your-ira/
REQUIRED MINIMUM DISTRIBUTIONS: TODAY’S SLOTT REPORT MAILBAG
By Andy Ives, CFP®, AIF®
IRA Analyst
QUESTION:
I inherited a traditional IRA from my mother in 2024. She passed before her required beginning date (RBD.) I know that I fall under the 10-year rule. The question is, do I need to start required minimum distributions (RMDs) in 2024 and deplete the account by 2034, or can I wait until 2034 and deplete the entire account all at once?
Thank you,
Holly
ANSWER:
Holly,
Since your mother passed away before her RBD, she never officially “turned RMDs on.” Since she did not start RMDs, then RMDs do not apply within the 10-year period. As such, you can leave the inherited IRA untouched and take a lump sum distribution by the end of 2034 if you wish. (However, it may behoove you to gradually draw down the inherited IRA over the full 10-year period to avoid a big tax hit in year 10.)
QUESTION:
Some of my IRAs are Roth and some are traditional. If my RMD is $1,500, can I withdraw the $1,500 from my Roth IRA, or must I take it from a traditional IRA?
ANSWER:
Your RMD must be withdrawn from the traditional IRA, because that will generate a taxable distribution. The IRS gives us the opportunity to maintain a tax-deferred IRA until it’s time for RMDs. At that point, the IRS wants their tax dollars. Consequently, a distribution from a Roth IRA cannot qualify as your traditional IRA RMD.
https://irahelp.com/slottreport/required-minimum-distributions-todays-slott-report-mailbag-2/
401(k) to IRA Rollover – 3 Buckets
By Andy Ives, CFP®, AIF®
IRA Analyst
Workplace retirement plans – like a 401(k) – can hold different types of dollars. Typically, a 401(k) will have a pre-tax bucket and a Roth bucket. Occasionally, a plan will have a third bucket to hold after-tax (non-Roth) money. When it comes time to roll all these plan dollars to an IRA, where should (and where can) the different dollars go?
Pre-Tax. Pre-tax salary 401(k) deferrals, employer matches, and any subsequent earnings on these dollars within the plan are typically rolled over to a traditional IRA. By rolling to a traditional IRA, the funds retain their tax-deferred status. Once in the traditional IRA, the former plan dollars and any future earnings avoid taxation until they are distributed.
But rolling pre-tax plan dollars to a traditional IRA is not required. A plan participant could roll all or a portion of his pre-tax 401(k) dollars directly to a Roth IRA, bypassing a traditional IRA completely. This transaction qualifies as a valid Roth conversion. (Some refer to this as a “mid-air conversion.”) The pre-tax plan dollars will then be taxable for the year of the rollover.
Roth. Roth 401(k) salary deferrals and earnings can only be rolled to a Roth IRA. Assuming the proper 5-year clocks and age 59 ½ rules are met, all Roth earnings from the plan (as well as future earnings within the Roth IRA) will be tax-free. Do NOT make the mistake of rolling Roth plan dollars to a traditional IRA. That is a “no-go zone.”
After-Tax (Non-Roth). After-tax 401(k) contributions are not available in every plan. But if they are, after-tax plan contributions are just that – after-tax dollars. However, these are not Roth funds. Meaning, earnings on these after-tax dollars are taxable. If your plan includes a bucket for after-tax dollars, understanding the implications of a future rollover is imperative.
Most 401(k) plans can separate after-tax contributions from their earnings. The after-tax contributions are typically rolled over to a Roth IRA. This qualifies as a tax-free conversion. The segregated earnings on the after-tax dollars are most often rolled to a traditional IRA. This makes sense as those after-tax earnings can then retain their tax-deferred status within the traditional IRA.
But routing the after-tax contributions to a Roth IRA via rollover and the after-tax earnings to a traditional IRA is not required. In fact, ALL of the dollars could be rolled to a traditional IRA or to a Roth, and there are consequences for each action.
Example: Robert has $50,000 of after-tax (non-Roth) contributions in his 401(k), and there are $20,000 of earnings associated with those contributions ($70,000 total). If Robert’s plan provider splits the money, a common recommendation is to roll the $50,000 to a Roth IRA (tax-free conversion) and the $20,000 to a traditional IRA. Another option is for Robert to roll the entire $70,000 to a Roth IRA. Since the $20,000 of earnings are pre-tax, those dollars would be taxable. A far-less-pleasant third option is to roll all $70,000 to a traditional IRA. Yes, the $20,000 would remain tax-deferred. However, the $50,000 would then be basis in the traditional IRA and must be accounted for. Meaning, the pro-rata rule is now introduced to all future distributions and conversions from Robert’s traditional IRA.
If you have different types of dollars within your 401(k), it is vital to know where each “bucket” should be sent via rollover and the ramifications of your decisions.
https://irahelp.com/slottreport/401k-to-ira-rollover-3-buckets/
401(k) Plans Can Now Offer Matching Contributions On Student Loan Payments
By Ian Berger, JD
IRA Analyst
If you are making student loan repayments, you should ask your employer if it will match those payments in the company’s retirement plan. The SECURE 2.0 Act allows for matching contributions on “qualified student loan payments” (or “QSLPs”) beginning with plan fiscal years starting after December 31, 2023. (This is January 1, 2024 for most plans.) Matches on QSLPs are optional; plans are not required to offer them.
SECURE 2.0 lacked detail about how these matching contributions would work, and that made many employers reluctant to implement this new option. On August 19, 2024, the IRS issued Notice 2024-63. The Notice answered several pending questions about the matching contribution feature and gave employers flexibility in establishing and administering the feature. This guidance should spur more employers to offer the QSLP match.
A QSLP match may be provided by a 401(k) plan, a 403(b) plan, a governmental 457(b) plan or a SIMPLE IRA.
To be a QSLP, the payment must be a repayment of a loan incurred by the employee to pay for higher education expenses of the employee, his spouse, or his dependent. A loan is “incurred” if the employee has a legal obligation to repay it. If an employee cosigns a dependent’s loan, the employee must be making the payment in order for it to qualify as a QSLP. If the dependent is making the payment, the employee can’t have those payments matched.
The total amount of QSLPs made for a calendar year can’t exceed the annual deferral limit in effect for that year (for 401(k) 403(b) and 457(b) plans in 2024, $23,000, or $30,500 for age 50 or older) minus any elective deferrals made during that year.
Example: Caroline, age 40, participates in her company’s 401(k) plan which matches on QSLPs. During 2024, she has $15,000 of qualified student loan payments. She may only make elective deferrals up to $8,000 ($23,000 – $15,000) during 2024.
Employees must certify that the loan payment satisfies the QSLP requirements and must certify the amount of the loan payment, the date of the loan payment, and that the payment was made by the employee. The certification rules are user-friendly but complicated. Employees can self-certify all of these requirements, but there are other ways to comply. Check with the plan administrator or HR to see what level of certification is required by your plan.
The IRS Notice also says that the QSLP match must be available to all employees eligible to receive matches on elective deferrals. So, an employer can’t limit QSLP matches to loan payments for an employee’s own education, a particular degree program (such as a Bachelor of Arts) or attendance at a particular school. The reverse is also true: All employees eligible to receive matches on QSLPs must be eligible to receive matches on elective deferrals.
Finally, QSLP matching contributions must be made at the same rate, and under the same vesting schedule, as the plan’s regular matching contribution. If a plan imposes any eligibility condition on a QLSP match (such as requiring employees to be employed on the last day of the plan year to qualify), the same condition must apply to a regular match.
https://irahelp.com/slottreport/401k-plans-can-now-offer-matching-contributions-on-student-loan-payments/
Roth 401(K) Rollovers and the Once-Per-Year Rollover Rule: Today’s Slott Report Mailbag
Sarah Brenner, JD
Director of Retirement Education
Question:
Can I roll over a Roth 401(k) to an existing Roth IRA or does it need to be in its own separate account? When does the 5-year holding period begin for the Roth 401K rollover?
Thank you,
Elisabeth
Answer:
Hi Elisabeth,
A Roth 401(k) can be rolled into an existing Roth IRA. The funds do not have to be kept separate. The 5-year holding period for tax-free distributions of earnings will be the existing Roth IRA’s 5-year holding period. This 5-year holding period does not restart with the rollover from the plan.
Question:
Dear IRA Help:
I have already done one 60-day rollover from a qualified plan to my IRA within the last 12 months, and I would like to do another 60 day-rollover from the same qualified plan to the same IRA. My IRA custodian is claiming I am limited to one 60-day rollover per year from a qualified plan to an IRA.
Can I please have a clarification?
Sincerely,
Victor
Answer:
Hi Victor,
Good news! The once-per-year rollover rule to which you are referring does not apply to your situation. This rule limits 60-day rollovers between IRAs. You may only roll over one distribution from all of your IRAs within a 365-day period. However, this rule does not apply to rollovers from plans to IRAs. There is no limit on the number of plan-to-IRA rollovers that can be done within a 365-day period.
https://irahelp.com/slottreport/roth-401k-rollovers-and-the-once-per-year-rollover-rule-todays-slott-report-mailbag/
New Rules Loosen or Eliminate Documentation Rules for See-Through Trusts
Sarah Brenner, JD
Director of Retirement Education
The new required minimum distribution (RMD) rules recently issued by the IRS include some good news for trusts named as retirement account beneficiaries. A documentation requirement (that tripped up many trustees resulting in a shorter payout period from the inherited account) has been loosened for plans and eliminated for IRAs.
See-Through Trusts
Only individuals who are named on the IRA beneficiary form (or named through the IRA custodial document if no beneficiary is named on the beneficiary form) can be designated beneficiaries. A trust is not an individual, so it cannot be a designated beneficiary. But if the trust qualifies as a “look through” or “see-through” trust, then the individual beneficiaries of the trust can qualify as designated beneficiaries for IRA distribution purposes. Meeting these requirements can allow a trust to use the 10-year payout period or, in some cases, even the stretch. Failing to meet the requirements outlined below can result in the payout period being reduced to five years.
New Rules
The final regulations keep the see-through trust concept. However, they simplify the documentation requirement for trusts that are beneficiaries of plan accounts, and do away with it entirely for trusts that are IRA beneficiaries.
Under the new rules, to qualify as a “see-through” trust for distribution purposes, the trust must meet the following requirements:
1. The trust is valid under state law or would be but for the fact that there is no corpus.
2. The trust is irrevocable, or the trust contains language to the effect it becomes irrevocable upon the death of the employee or IRA owner.
3. The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the employee’s or IRA owner’s benefit are identifiable.
4. OLD RULE: The required trust documentation must be provided by the trustee of the trust to the plan administrator no later than October 31 of the year following the year of the IRA owner’s death.
NEW RULE: The required documentation rules are simplified for trusts that are plan beneficiaries. A plan administrator can require the trustee to provide a list of trust beneficiaries with a description of the conditions on their entitlement instead of the actual trust document.
For trusts that are IRA beneficiaries, the documentation requirements are eliminated. A trustee of a see-through trust is NOT required to provide the trust documentation to an IRA custodian.
https://irahelp.com/slottreport/new-rules-loosen-or-eliminate-documentation-rules-for-see-through-trusts/
SUCCESSOR BENEFICIARIES AND INHERITED IRA ROLLOVERS: TODAY’S SLOTT REPORT MAILBAG
By Ian Berger, JD
IRA Analyst
Question:
Under IRS rules, if I am currently receiving required minimum distributions (RMDs) and die today, my non-spouse beneficiary has 10 years to pay out my IRA. If that beneficiary dies five years later (in August 2029), does the successor beneficiary have five years to continue to pay out RMDs, or does the 10-year period restart?
Thank you,
Annmarie
Answer:
Hi Annmarie,
The SECURE Act says that your beneficiary (assuming he is not an “eligible designated beneficiary”) must empty your inherited IRA by the end of the 10th year following the year of your death. Your beneficiary must also take annual RMDs during years 1-9 of the 10-year period. If your beneficiary dies before the end of the 10 years, the successor beneficiary is subject to the same 10-year period as the original beneficiary (i.e., no restart). Annual RMDs must be continued during the remaining five years by the successor.
Question:
Hello!
We have a client with an inherited IRA subject to the 10-year rule. The client has some short-term expenses. According to the custodian, we can do a 60-day rollover back into his own traditional IRA from funds originally distributed from the inherited traditional IRA. However, I’m questioning this. Can you provide some insight?
Appreciate your time!
Matt
Answer:
Hi Matt,
It was smart of you to question this. The general rule is that a distribution from an inherited IRA may not be rolled over to the beneficiary’s own IRA. The only exception is for a surviving spouse beneficiary.
https://irahelp.com/slottreport/successor-beneficiaries-and-inherited-ira-rollovers-todays-slott-report-mailbag/
New Rules: Aggregating Year-of-Death RMDs
By Andy Ives, CFP®, AIF®
IRA Analyst
In my August 19 Slott Report (“Year of Death RMD – Deadline Extended!”), I wrote about the required beginning date, who takes the year-of-death required minimum distribution (RMD), and the deadline for taking that distribution. Today’s article focuses on an additional nuance of the year-of-death RMD – something created by the final regulations (released July 18, 2024) – that could make taking the year-of-death RMD a little clunky in some situations.
Aggregation rules tell us that a living person with multiple IRAs can calculate the annual RMD for each account, and then take the total RMD from any combination of their IRAs. This ability to aggregate lifetime RMDs across multiple IRA accounts impacts how beneficiaries can divide what remains of a year-of-death RMD.
If no distributions were taken from any IRA in the final year of the IRA owner’s life, the math is straightforward. We calculate the year-of-death RMD for each IRA, and the beneficiary (or beneficiaries) of each specific IRA must take the year-of-death RMD applicable to that account, from that account.
But what if an IRA owner of multiple IRAs with different beneficiaries took a lifetime distribution from one of his IRAs, thereby partially satisfying his own final aggregated RMD before death? We must now look to his total aggregated final year-of-death RMD and apply the shortfall to each of his IRAs. The shortfall is spread across all IRAs proportionally based on the total prior year-end balance of each account.
Example 3: Malcolm died in December of 2024 at the age of 75. At the time of Malcolm’s death, he owned two separate traditional IRAs. The prior-year-end balances of IRA #1 and IRA #2 (as of December 31, 2023) were $100,000 and $50,000, respectively. Based on the $150,000 total balance, Malcolm’s 2024 aggregated RMD was $6,098 ($150,000/24.6). Before his death, Malcolm had taken a $3,000 distribution from the smaller IRA #2 in 2024, and nothing from IRA #1. The remaining portion of his aggregated 2024 year-of-death RMD was $3,098.
Malcolm named his son John as beneficiary of the $100,000 IRA #1 and his daughter Susan as beneficiary of the $50,000 IRA #2. Based on the total prorated prior-year-end balances, beneficiary John and the larger IRA is responsible for 2/3 of the remaining year-of-death RMD ($2,065). This distribution must come from IRA #1. Beneficiary Susan is responsible for 1/3 of the remaining year-of-death RMD ($1,033). This distribution must come from IRA #2.
As mentioned, this end result is a bit clunky, for a couple of reasons. Technically, by taking the $3,000 from the smaller IRA #2 while he was still alive, Malcolm satisfied the RMD for that specific account ($50,000/24.6 = $2,033). However, since Malcolm had not yet satisfied his total aggregated 2024 RMD, the shortfall is prorated over each of his IRAs.
Communication is key to satisfying the prorated year-of-death distribution rule. What if the beneficiaries don’t know each other? What if beneficiaries and financial advisors are unaware of IRA accounts held with other custodians? This could result in certain beneficiaries taking more of the prorated year-of-death RMD than is required, and/or a shortfall in another account. But such a result may be unavoidable. Time will tell how this year-of-death RMD aggregation wrinkle plays out.
https://irahelp.com/slottreport/new-rules-aggregating-year-of-death-rmds/
New IRA Aggregation Rule When Doing a Rollover in an RMD Year
Ian Berger, JD
IRA Analyst
If you have multiple traditional IRAs and want to do a 60-day rollover (or Roth conversion) in a year when a required minimum distribution (RMD) is due, the IRS has a surprise for you.
RMDs from multiple traditional IRAs (and SEP or SIMPLE IRAs) can be aggregated and paid from any one or more of those IRAs.
But what if you have multiple IRAs and want to do a rollover (or conversion) of one or more of your IRAs during a year when a RMD is due? The first dollars distributed out of an IRA (or plan) during an RMD year are considered to be RMDs. In addition, RMDs cannot be rolled over. But how do these rules apply if the amount you take out from an IRA is more than the RMD due from that IRA for the year?
Before the IRS issued proposed RMD regulations in 2022, you could take out just the RMD due from that IRA and then roll over or convert the rest. In other words, it wasn’t necessary to withdraw the total RMDs due from all your IRAs that year before being able to do a rollover. You only needed to satisfy the RMD for that particular IRA.
But the 2022 proposed regulations established a new rule, and the IRS just confirmed the new rule in its final regulations. This new rule says that if you have multiple IRAs, all of the RMDs due from each of your IRAs in a calendar year must be satisfied before you can do a rollover (or Roth conversion) of any IRAs during that year. (By contrast, you don’t have to take RMDs first if you do a direct transfer from one traditional IRA to another traditional IRA – instead of a 60-day rollover or a conversion.)
Example: Consuelo has three traditional IRAs: IRA #1, IRA #2 and IRA #3. She turns age 73 in 2024 and must start taking RMDs from those IRAs. Her 2024 RMD from IRA #1 is $4,000, her RMD from IRA #2 is $6,000, and her RMD from IRA #3 is $8,000. This gives her $18,000 of total 2024 RMDs. Before taking any RMDs this year, Consuelo withdraws $5,000 from IRA #1 and wants to convert it to a Roth IRA. Since her total 2024 RMDs are $18,000, Consuelo can’t convert any of the $5,000 withdrawal. Instead, she must apply it to the total RMD, and it will just be a taxable distribution. But she has reduced her 2024 RMD shortfall to $13,000 ($18,000 – $5,000).
The next day, Consuelo withdrawals $25,000 from IRA #2 in another attempt to do a Roth conversion. The first $13,000 of that withdrawal must be applied to wipe out the RMD shortfall. But she can convert the remaining $12,000.
https://irahelp.com/slottreport/new-ira-aggregation-rule-when-doing-a-rollover-in-an-rmd-year/
Roth IRAs and Successor Beneficiaries: Today’s Slott Report Mailbag
By Andy Ives, CFP®, AIF®
IRA Analyst
QUESTION:
I have been getting emails from a few sites pitching their subscriptions. They claim that Roth IRAs will all be taxable in the future. They say there are things you can do to avoid these taxes, but to find out what they are you have to subscribe to their newsletter. Is this true, and if so, how can one avoid taxes for Roth IRAs?
ANSWER:
Spam emails like you are referring to are oftentimes nothing more than shady sales pitches preying on fear. Don’t believe their false hype, and certainly don’t hand over any of your hard-earned dollars to these organizations. There are no guarantees as to what might happen in the future. However, despite what anyone says, we don’t think Roth IRAs will be taxable, for a multitude of reasons. For one, Congress loves Roth IRAs, because they generate tax revenue immediately. Why else would they recently create Roth SEP accounts and Roth SIMPLE plans? More Roth options mean more tax revenue now. Also, it would be politically risky to tax Roth IRAs since it would be seen as Congress reneging on their promise of a tax-free retirement savings account. So, when we look beyond the noise, all indicators say tax-free Roth accounts are here to stay.
QUESTION:
I inherited an IRA from my sister in 2008, so I take required minimum distributions (RMDs) based on the old (pre-SECURE Act) rules. I anticipate my children inheriting the remainder of the inherited IRA in the future. Will they be subject to the new 10-year RMD rules?
Thank you,
Bettilou
ANSWER:
Bettilou,
When your children inherit your inherited IRA, they will be “successor beneficiaries.” As successor beneficiaries, you are correct that they will receive the 10-year payout rule. Since you are operating under the old rules and taking annual “stretch” RMDs, the successor beneficiary rules dictate that your children must also continue those payments. They will essentially “step into your shoes” and continue with the same RMD factor that you are using, minus 1 each year, for years 1 – 9. (They will not use their own life expectancies.) They will also have the added layer of the 10-year rule, so whatever remains in the account at the end of year 10 must be distributed.
https://irahelp.com/slottreport/roth-iras-and-successor-beneficiaries-todays-slott-report-mailbag/
The Roth IRA Advantage Under the Final RMD Rules
Sarah Brenner, JD
Director of Retirement Education
In 2020, the SECURE Act completely changed the game for nonspouse IRA beneficiaries. Now, most are subject to the 10-year payout rule. Recently released final RMD rules keep the controversial proposed rule that requires many beneficiaries subject to the 10-year rule to also take annual required minimum distributions (RMDs) during the 10-year period.
Here is some good news if you are inheriting a Roth IRA. This confusing and burdensome requirement of annual RMDs during the 10-year period will not apply to you.
Here’s why. The requirement to take annual RMDs during the 10-year period only applies when the IRA owner died on or after his required beginning date (RBD). The RBD is date by which RMDs must begin. For IRA owners, this would be April 1 of the year following the year the individual reaches age 73. Roth owners, however, are not subject to lifetime RMDs. Therefore, they have no RBD. So, every Roth IRA owner is deemed to have died before their RBD, regardless of their age at death. For example, a Roth IRA owner who dies at age 100 is still deemed to have died before her RBD.
Under the new final RMD rules, beneficiaries of traditional IRAs who are subject to the 10-year rule must take annual RMDs in years 1-9 of the 10-year period when death occurs on or after the RBD. But this is not the case for a Roth IRA beneficiary, since all Roth IRA owners are considered to have died before their RBD.
This can allow the inherited Roth funds to continue to accumulate income tax free for the full 10-year term. This is a huge advantage for Roth IRA beneficiaries. The full balance of the inherited Roth must still be withdrawn by the end of the 10th year after death, but nothing has to be taken any earlier. The entire balance can then be withdrawn as a completely tax-free distribution.
Example 6: Miguel, age 80, dies in 2024. The beneficiary of his Roth IRA is his daughter, Madi, age 50. Madi will be subject to the 10-year rule, so the entire inherited Roth IRA must be distributed by December 31, 2034. However, she does not have to take annual RMDs during the 10 years.
https://irahelp.com/slottreport/the-roth-ira-advantage-under-the-final-rmd-rules/
Year-of-Death RMD – Deadline Extended!
By Andy Ives, CFP®, AIF®
IRA Analyst
When a person reaches the required beginning date (RBD) – generally April 1 of the year after the year the person turns age 73 – required minimum distributions (RMDs) must officially start on traditional IRAs. But what if an IRA owner dies in a year when the RMD is due, but before the full RMD has been paid out?
Ultimately, it is the responsibility of the beneficiary to take whatever remains of the unpaid year-of-death RMD. If there is more than one beneficiary, the 2024 final regulations, released on July 18,2024, confirm what we have long understood the rule to be: When an IRA has multiple beneficiaries, and if there is a shortfall of the year-of-death RMD, then any of the beneficiaries can take what remains of this final distribution. The year-of-death RMD is not paid to the estate unless the estate was the named beneficiary. From the summary of the final regulations:
“If an employee who is required to take a distribution in a calendar year dies before taking that distribution and has named more than one designated beneficiary, then any of those beneficiaries can satisfy the employee’s requirement to take a distribution in that calendar year (as opposed to each of the beneficiaries being required to take a proportional share of the unpaid amount).”
This rule can be helpful in many situations. For example, if a charity is named as a partial beneficiary, cashing out the charity’s percentage could cover what remains of the year-of-death RMD. The same holds true if, for example, one of the beneficiaries needs cash now. That lone beneficiary’s payout could potentially satisfy the balance of the year-of-death RMD, allowing the other beneficiaries to avoid an immediate distribution.
Historically, the deadline for taking the year-of-death RMD was December 31 of the year OF death. When death occurred late in the year, this tight deadline was often missed, adding unnecessary stress on beneficiaries. Missing a year-of-death RMD could result in the same penalty as missing any other RMD – 25% of whatever amount was not taken (reduced to 10% if the missed RMD is timely corrected).
In the IRS’s final regulations, the deadline to take the year-of-death RMD (and thereby avoid any penalty) is officially extended: “The final regulations extend the deadline for the beneficiary to take the missed required minimum distribution and be eligible for the automatic waiver. The new deadline is the later of the tax filing deadline for the taxable year of the beneficiary that begins with or within the calendar year in which the individual died and the end of the following calendar year.”
For most beneficiaries, this means the year-of-death deadline in now December 31 of the year AFTER the year of death.
Example: Grampa Joe, age 80, has a traditional IRA with his granddaughter Grace, age 22, as beneficiary. Grampa Joe’s annual RMD is normally paid on December 15. However, he dies on December 10, 2024. Granddaughter Grace is responsible for taking the 2024 year-of-death RMD, but in her grief and confusion, she fails to take it. Grace is eligible for an automatic waiver of the 25% missed RMD penalty if she takes the 2024 year-of-death RMD by December 31, 2025.
https://irahelp.com/slottreport/year-of-death-rmd-deadline-extended/
The 10% Penalty and Required Minimum Distributions: Today’s Slott Report Mailbag
By Sarah Brenner, JD
Director of Retirement Education
Question:
Hello,
I’m in my sixties, in the golden years for Roth conversions, which I’ve been doing. I’ve had a small Roth IRA account for more than 5 years. Last year I converted $90,000. This year will be about the same.
My question regards withdrawals. If I withdraw from my Roth IRA, am I exempt from the 10% early distribution penalty because I’m over age 59 1/2?
Thank you!
Answer:
The rules for the taxation of Roth IRA distributions can be confusing. Fortunately, this particular rule is easy. When you are over age 59 ½, you will never be subject to a 10% penalty on any withdrawal of converted amounts from your Roth IRA.
Question:
Hello Ed,
If I take more than my required minimum distribution (RMD) this year, will the IRS allow that as credit applied to following year’s RMD?
Looking forward to your answer!
Thank you,
Mark
Answer:
Hi Mark,
You can always take more than your RMD from your IRA in any given year. Unfortunately, this extra amount cannot be used as credit toward an RMD in a future year. Regardless of how much you take from your IRA this year, you will still need to satisfy the full RMD amount next year.
https://irahelp.com/slottreport/the-10-penalty-and-required-minimum-distributions-todays-slott-report-mailbag/
Roth 401(k) Dollars Are No Longer Subject to RMDs
By Ian Berger, JD
IRA Analyst
If you have both pre-tax and Roth accounts in a 401(k) (or a 403(b) or governmental 457(b)) and are subject to required minimum distributions (RMDs), be aware of new rule changes made in the 2022 SECURE 2.0 law. The rules were clarified in the IRS RMD final regulations, which came out on July 18.
Starting with RMDs for 2024, Roth plan accounts can be disregarded when your RMD is calculated. (Roth IRAs have always been exempt from lifetime RMDs.) Many of you won’t be affected by this change while you’re still working because you can use the “still-working exception” to defer RMDs until retirement. But those who can’t use that exception (because you own more than 5% of the company where you work or your plan doesn’t offer the exception) will be affected once RMDs kick in – generally in the year you turn 73.
The new rule will also affect you if you have a Roth plan account and retire on or after 2024 in a year when RMDs are due and you want to roll over your 401(k) to an IRA. When that happens, the RMD due from the plan for the year of retirement must be paid before any funds can go to the IRA. With this new SECURE 2.0 change, the prior-year 12/31 value of your Roth accounts can be disregarded when your year-of-retirement RMD is calculated.
Example: Simone, age 75, is employed by Gymnastics Clubs of America. She has been participating in the company’s 401(k) and has pre-tax and Roth dollars there. Simone has never owned more than 5% of GCA, so she has been using the still-working exception to delay RMDs until her retirement. On September 1, 2024, Simone retires from GCA and wants to roll over her entire 401(k) to Roth and traditional IRAs. Simone can do the rollovers, but she must first receive her RMD for 2024. This RMD will calculated without considering her Roth plan dollars.
Another part of the new regulations confirms that a withdrawal from a Roth 401(k) account in a year an RMD is required does not count towards satisfying your RMD for that year. This is not surprising since Roth dollars are after-tax. Plan RMDs can only be satisfied with distributions from the taxable portion of your plan.
What is surprising is a new rule in the final regs that may impact your beneficiaries if you have both pre-tax and Roth plan accounts. If a plan participant (or IRA owner) dies on or after her required beginning date (RBD) for starting RMDs, beneficiaries subject to the 10-year payout rule must also take annual RMDs during that 10-year term.
Beneficiaries subject to the 10-year rule who inherit both traditional and Roth IRAs from an IRA owner who dies on or after the owner’s RBD only have to take annual RMDs on the traditional IRAs. That’s because Roth IRA owners are always considered to have died before their RBD.
This ability to separate pre-tax from Roth is not allowed when a 401(k) participant with both pre-tax and Roth accounts dies. The IRS says the RBD for the Roth accounts is the same as the RBD for the pre-tax accounts. So, if you die on or after your RBD, any 401(k) beneficiary subject to the 10-year rule must take annual RMDs on your entire inherited account, including the Roth funds.
https://irahelp.com/slottreport/roth-401k-dollars-are-no-longer-subject-to-rmds/
Proposed Regs Bring New Rules for Spouses Beneficiaries When Death is Before the RBD
By Sarah Brenner, JD
Director of Retirement Education
Of all the many provisions in the SECURE 2.0 Act, none has been more perplexing than Section 327, which changed the rules for spouse beneficiaries. It has been hard to figure out what Congress intended in drafting section 327. The legislative history is scant. On July 18, the IRS issued proposed regulations on the required minimum distribution (RMD) rules from the SECURE 2.0 Act. One significant part of these proposed regulations is the IRS’s interpretation of Section 327.
The Senate Finance Committee Report, which explains the provisions of SECURE 2.0, said only the following: “Section 327 allows a surviving spouse to elect to be treated as the deceased employee for purposes of the required minimum distribution rules.”
But what exactly does allowing the surviving spouse to be treated as the deceased spouse mean?
The statute is not clear, but in the newly released proposed regulations, the IRS explains the rules.
Under the proposed regulations, a surviving spouse can delay RMDs until the IRA owner would have reached the age when RMDs must start (currently age 73). When death is before the required beginning date (RBD – currently April 1 of the year after the year a person reaches age 73 for most), this happens automatically.
When RMDs start on this inherited IRA, the surviving spouse beneficiary will calculate RMDs using their age and the Uniform Lifetime Table. The use of the Uniform Lifetime Table to calculate spousal beneficiary RMDs is new and will result in smaller RMDs. This table has only previously been used to calculate RMDs during an individual’s lifetime.
The new regulations also make it clear that when 327 applies, the IRA is still considered an inherited account. This means that the 10% early distribution penalty does NOT apply, which is good news for young spouse beneficiaries who may need the money. Also, in more good news, despite the automatic inherited IRA creation, the regulations clarify that a spousal rollover can still be done at any point.
Example: Derek dies in 2024 at age 50. His beneficiary is his spouse, Katie, who is age 54. Katie will not have to take RMDs on the automatically created inherited IRA until Derek would have been required to start taking them. This will allow her to delay RMDs for decades. When she starts taking RMDs, she will use her age and the Uniform Lifetime Table.
Katie can take distributions at any time from the inherited account. These distributions will always be penalty-free regardless of her age. She can do a spousal rollover to her own IRA at any time.
https://irahelp.com/slottreport/proposed-regs-bring-new-rules-for-spouses-beneficiaries-when-death-is-before-the-rbd/
INHERITED ROTH IRAs AND NUA: TODAY’S SLOTT REPORT MALBAG
By Ian Berger, JD
IRA Analyst
Question:
Thank you for all of the wonderful information. I have a question as to how the July 18, 2024 final regulations impact inherited Roth IRAs. My daughters inherited Roths from their grandmother 3 years ago. She was age 101. They were planning to just let them grow until the end of the 10-year payout period. Do the new final SECURE Act regulations now require them to take RMDs before 10 years?
Similarly, assuming no law changes, based on the July 2024 regulations, if they inherit my Roths (I am now 74), will they need to take annual RMDs or just do a payout by the end of the 10 years?
My understanding is that in both cases they would not be an eligible designated beneficiary.
Thanks.
Answer:
You are correct that in both cases, your daughters are “non-eligible designated beneficiaries.” That is why they are subject to the 10-year payout rule. But since they are inheriting Roth IRAs, they are not required to take annual RMDs during the 10-year period and can let the inherited Roth IRAs grow tax-free for 10 years. The recent IRS regulations did not change this rule.
Question:
I attended the recent Instant IRA Success 2-Day IRA Workshop in Maryland and have a question on a net unrealized appreciation (NUA) opportunity for a client who is age 62 but still working at his employer. He would like to complete an in-service withdrawal with NUA but will still be contributing to his 401(k) for the remainder of the year (and until retirement). The subsequent contributions will cause the account to not be at $0 as of 12/31/24.
Can he use the NUA strategy now?
Answer:
Thank you for attending our workshop. For your client to use the NUA strategy now, he would have to empty his entire 401(k) account by 12/31/24 and stop contributing for future years. If he were to continue to contribute, that would nullify the NUA distribution. He could also wait and use NUA in the calendar year when he separates from service (or in any subsequent calendar year). But he would have to take his entire 401(k) account out during the calendar year that he completes an NUA transaction.
https://irahelp.com/slottreport/inherited-roth-iras-and-nua-todays-slott-report-malbag/
A PHILOSOPHICAL SLOTT REPORT ENTRY
By Andy Ives, CFP®, AIF®
IRA Analyst
Trapped. For two nights in July, I slept on the floor at Atlanta Hartsfield International Airport – a victim of the mass Delta computer outage. Booking a hotel after midnight (when the final cancellation hit) was not worth the commute or early morning TSA re-entry trouble. Delays and stand-by forced travelers to remain on site in case of last-minute seat availability. Rental car companies claimed to be out of vehicles. Not knowing the full magnitude of the disruption, I trusted the airline to figure things out. As a back-up plan, I bought a second one-way ticket on the first flight out on Day 3 to secure my seat.
And then that flight was canceled.
Trust was broken. Confidence lost. Frustration and rage bubbled over. Disgusted travelers joined forces to organize their own transportation. Some booked long-haul Ubers. Others pooled funds to rent 16-seat passenger buses. With the help of another couple I met at the gate, I finally secured a rental car, and the three of us drove 5 hours to our final destination in Northeast Florida.
In retrospect, my eyes were opened. We slog through our days and weeks, sticking to our schedules, maintaining routines. Get up at the same time, drive to work the same way, follow the same exercise program, eat similar meals each week. Eventually, the daily pathway becomes so comfortable that it is difficult to imagine anything different. We trundle along this wide routine road with little to no concern of being knocked off course.
I now realize that our “daily routine path” is not so wide. In fact, it is as narrow as an Olympic balance beam. One nudge, one little misstep, and a fall is imminent. One trip, one alteration, and your routine can not only be disrupted, but life can be sent spinning in a completely different direction. Case in point: I was minding my own business, traveling home from a financial advisor conference, looking forward to spending time with my family over the weekend…
And I got shoved off my balance beam in Atlanta.
I met an attorney who pointed out some features on the Delta app that I was unaware of. (I hope she made it back to Florida soon thereafter.) Late one night, I showed a father and his adolescent son how riding in the first car of the underground PlaneTrain offers a neat view of the tunnel out the front window. (I hope they made it to France.) I hunkered down for the night on the carpet a few feet away from a woman who used sheets of salvaged cardboard to make her “bed” more comfortable, and said “Good night” after she said the same to me. (I hope she made it to the Philippines.) And I shared a long ride in a rental car from Atlanta to Jacksonville with a wonderful couple whom I never would have met had it not been for the disruption of our routines. (Sorry their ski vacation plans were canceled.) We might meet up for dinner sometime, and I will happily introduce them to my wife.
So, what’s the point of this Slott Report entry? Get your affairs in order – financial, retirement savings, personal, etc. Recognize that our daily “routine roads” are nowhere near as wide as we might think they are. Talk to people. And listen. Don’t waste a day. Appreciate friends and family and all you have. Help others, and know that when things get really sideways, people will help you. Be open to new experiences, and be aware that the paths we walk are narrow. Balanced on a pinhead. Opportunity and chaos stride shoulder to shoulder with each of us. A disruptive nudge into their arms could be right around the corner.
https://irahelp.com/slottreport/a-philosophical-slott-report-entry/
IRS FINAL REGULATIONS LOOSEN DEFINITION OF “ELIGIBLE DESIGNATED BENEFICIARY”
By Ian Berger, JD
IRA Analyst
One of the positive outcomes of the new IRS final SECURE Act regulations on required minimum distributions (RMDs), released on July 18, is that more beneficiaries will be able to stretch RMDs over their lifetime.
Under the 2020 SECURE Act, only a certain class of individual beneficiaries – eligible designated beneficiaries (EDBs) – of IRAs and company plan accounts can use the stretch. Individual beneficiaries who are not EDBs must instead now use a 10-year payment rule.
Under the SECURE Act, EDBs are designated beneficiaries who are:
- The surviving spouse of the IRA owner or plan participant;
- A minor child of the account owner;
- A disabled individual;
- A chronically ill individual; or
- A person not more than 10 years younger than the account owner.
The final regulations don’t expand these categories. But the regs do make it easier for certain people to fit into one of these categories:
- Minor children. A child of an account owner is an EBD if the child is under age 21 when the account owner dies. The final rules expand the definition of “child” to include legally adopted children, stepchildren and foster children.
- Disabled individuals. Under the SECURE Act, someone is considered disabled if they are unable to perform any job as a result of a physical or mental impairment which can be expected to result in death or continue indefinitely.
In the final regulations, the IRS provides an alternative definition that can be used when the beneficiary is under age 18 when inheriting an IRA or plan account. This alternative definition replaces the requirement that the beneficiary’s impairment makes it impossible for him to perform any job with a requirement that the impairment causes severe functional limitations. The alternative definition should make it easier for young beneficiaries to meet the “disability” standard and become an EDB.
Wouldn’t a disabled child under 18 automatically qualify as an EDB on
account of being a minor? Yes, but a disabled child who turns 21 would
remain an EDB, while a child not disabled would become a non-EDB and
become subject to the 10-year payment rule at age 21.
The final regulations also say that someone who has been found to be disabled by the Social Security Administration is automatically considered to be an EDB.
- Documentation of disability or chronic illness. The SECURE Act requires that documentation of disability or chronic illness be provided to the IRS custodian or plan administrator. The IRS previously required this documentation to be given by October 31 of the year following the year of the account owner’s death.
These rules raised privacy concerns. In response, the IRS completely waived the certification requirement for IRA beneficiaries. For plan beneficiaries, the IRS said the certification “need not be overly detailed” and can be satisfied without providing backup documentation such as medical records. In addition, a disabled or chronically ill beneficiary who inherited a plan account in 2020-2023 and did not provide the required certification by the October 31 deadline has until October 31, 2025 to do so.
https://irahelp.com/slottreport/irs-final-regulations-loosen-definition-of-eligible-designated-beneficiary/
INHERITED IRAS AND NET UNREALIZED APPRECIATION: TODAY’S SLOTT REPORT MAILBAG
QUESTION:
I inherited both a traditional and a Roth IRA from my significant other (non-spouse) who passed away in 2021. He had started taking required minimum distributions (RMDs). I am less than 10 years younger than he was. Question is: do I or do I not have to empty both accounts within 10 years of his death? No one is giving me an answer one way or another.
ANSWER:
There are a few moving parts here, so it is no surprise you can’t find a straight answer. Since you are “not more than 10 years younger” than the deceased account owner, you qualify as an eligible designated beneficiary (EDB) under the SECURE Act. As an EDB, the payout structure is based on the type of account. For the traditional IRA, you can take annual stretch RMDs based on your own single life expectancy. Use your age in 2022 to determine the original life expectancy factor, then subtract 1 each year thereafter. The 10-year rule does not apply.
For the inherited Roth IRA, you have a couple of options. As an EDB, you could choose the 10-year payout rule. There are no RMDs within the 10-year period on inherited Roth IRAs. Or, you could choose lifetime stretch RMD payments. These RMDs would be calculated the same way as on the traditional IRA.
QUESTION:
I have purchased your books and followed your articles over the past 25 years. Thank you for your knowledge. Next year I am required to take my first RMD as I will be age 73. I have been retired since 2019. I have never taken any distribution from my 401(k) and have appreciated company stock. I understand a net unrealized appreciation (NUA) transaction can count towards an RMD. My question: does both the cost basis and the NUA portion count toward the RMD? Or does just the cost basis count towards the RMD? I have received some conflicting answers to this question.
Sincerely,
Dom
ANSWER:
Dom,
Yes, you can leverage the NUA tax strategy in conjunction with an RMD distribution. It appears you may be eligible for NUA as you have hit the separation-from-service trigger and have not touched the 401(k). If you pursue an NUA distribution, only the cost basis will be taxed as ordinary income in the year of the distribution. However, the total NUA distribution (cost basis AND appreciation) will count toward your RMD.
https://irahelp.com/slottreport/inherited-iras-and-net-unrealized-appreciation-todays-slott-report-mailbag/
NEW RMD REGS HAVE A SURPRISING RESULT FOR MINOR CHILD BENEFICIARIES
By Sarah Brenner, JD
Director of Retirement Education
In newly released final required minimum distribution (RMD) regulations, the IRS is doubling down on its position that annual RMDs are required for some beneficiaries during the SECURE Act’s 10-year payout period. This rule has a surprising result for minor children who inherit an IRA from a parent.
The RMD regulations say that if an IRA owner died on or after his required beginning date for starting RMDs, then annual RMD payments must continue to a beneficiary who is subject to the 10-year rule upon the death of the IRA owner. However, the rule requiring annual RMDs to continue is not only limited to this situation.
Under the SECURE Act, a minor child of the account owner is considered an eligible designated beneficiary and can stretch distributions from an inherited IRA over their life expectancy until reaching age 21. Once this age is reached, the 10-year rule applies. However, the final RMD relations retain a surprising twist introduced by proposed regulations back in 2022. The rule requiring annual RMDs to continue also applies during the 10-year period, regardless of whether the parent died before or after the required beginning date for the parent’s own RMDs.
Example: In 2025, Ella, age 10, inherits an IRA from her mother, 36. Ella is an eligible designated beneficiary (EDB) and can stretch distributions over her single life expectancy. This will go on for 11 years. Ella’s 21st birthday is in 2036. Because Ella has reached age 21, the 10-year rule will then apply. This means that Ella must empty the inherited IRA by December 31, 2046 – by the end of the 10th year after she reached age 21.
But even though Ella’s mother died well before her required beginning date for her own RMDs, Ella must continue to take annual RMDs for years 1-9 of the 10-year period. Because annual RMDs have started, the rules require that they continue.
https://irahelp.com/slottreport/new-rmd-regs-have-a-surprising-result-for-minor-child-beneficiaries/
PART 2: INHERITED ROTH IRA BY SPOUSE BENEFICIARY – 5-YEAR CLOCK ISSUES?
By Andy Ives, CFP®, AIF®
IRA Analyst
In Part 1 (July 17), I discussed 5-year clock issues when a non-spouse beneficiary inherits a Roth IRA. In Part 2, I will hit on the important concepts and options available when a spouse inherits a Roth IRA.
Keep as Inherited Roth IRA. If a spouse is under age 59 ½ when she inherits, she may want to keep the account as an inherited Roth IRA. This way she will have immediate and full access to the account with no concern about a 10% penalty. Required minimum distributions (RMDs) would not apply until the deceased spouse would have been age 73. If the deceased spouse had not yet met the 5-year clock, the surviving spouse would have to wait out the 5-year period on this specific inherited Roth IRA before the earnings would be tax-free. However, based on Roth IRA distribution ordering rules, contributions and converted Roth dollars would have to be completely depleted before the earnings could be touched. Hopefully the surviving spouse could hold off touching the inherited Roth IRA earnings. When the surviving spouse turns age 59 ½ (or any time after the inherited Roth IRA is established), she can do a spousal rollover.
Spousal Rollover. If a young surviving spouse did not need immediate access to the inherited Roth IRA dollars, or if the surviving spouse was age 59 ½ or older, the decision should be made to do a spousal rollover. After a spousal rollover, it is as if the assets belonged to the surviving spouse all along. But what if the deceased spouse had not yet met his 5-year holding period on the original Roth IRA? A spouse beneficiary can use either the deceased spouse’s 5-year clock or her own 5-year clock – whichever is more favorable. However, she must abide by her own age.
Example: Mark, age 60, started his first Roth IRA 2 years ago. Sadly, he passed away. His wife Janet, age 58, was his sole beneficiary. If Janet elects an inherited Roth IRA, she will have full access to the account penalty-free (with no RMDs until Mark would have been age 73). However, she must abide by Mark’s original 5-year clock before any earnings will be tax-free. This is the case with this inherited Roth IRA even if Janet has her own Roth IRA.
If Janet elects to do a spousal rollover, she can choose which 5-year clock is most beneficial to her and have no lifetime RMDs. Janet opened her own Roth IRA 10 years ago, so she is well past the 5-year holding period. The spousal rollover Roth IRA dollars will adopt Janet’s advanced clock. However, she must still abide by her own age 58 when it comes to determining which Roth dollars she has access to tax-free (i.e., contributions, conversions and earnings).
Care must be taken by a surviving spouse not to accidentally undo a tax-free Roth IRA. How could this happen? What if Mark from the example above had already met his own Roth IRA 5-year clock? Since he was age 60, he would have full tax-free access to his entire Roth IRA. After his death, if Janet did a spousal rollover, the earnings on those inherited Roth dollars would no longer be tax-free. Why? Janet is only 58. She would have to wait until age 59 ½ for the dollars to regain their tax-free status.
Whether you are a spouse beneficiary or a non-spouse, it is imperative to understand the rules when it comes to inheriting a Roth IRA. Knowing which dollars are available tax-free and which dollars are still bound by a 5-year clock could save some heartache when it comes to tax time.
https://irahelp.com/slottreport/part-2-inherited-roth-ira-by-spouse-beneficiary-5-year-clock-issues/
HOW ARE ANNUAL RMDS IN THE 10-YEAR PERIOD CALCULATED?
By Ian Berger, JD
IRA Analyst
In the July 22, 2024 Slott Report, my colleague Sarah Brenner explained how the IRS, in its final SECURE Act required minimum distribution (RMD) regulations issued on July 18, did not budge on a controversial position it had taken in its 2022 proposed regulations. The issue is whether a retirement account beneficiary subject to the 10-year payout rule who inherits from an IRA owner after the owner had started RMDs must continue annual RMDs during the 10-year period. The IRS said yes. Sarah gave the following example:
Example: Karen inherited a traditional IRA from her mother Linda, who died at age 85 in 2020. Under the SECURE Act, Karen is subject to the 10-year rule. She must empty the inherited IRA account by December 31, 2030. The new IRS final regulations also require her to take annual RMDs based on her life expectancy in years one through nine of the 10-year payout period. Due to the IRS waiver of the penalties for missed RMDs in years 2021, 2022, 2023, and 2024, Karen does not need to take RMDs for those years. However, beginning in 2025 she must take an annual RMD for years 2025-2029 from the inherited IRA.
So, how are Karen’s annual RMDs for 2025-2029 calculated assuming she turned age 60 in 2020 (the year her mother Linda died)? Let’s start with the 2025 RMD. Karen turns 65 in 2025. You might think we would look at the current IRS Single Life Table, see that the life expectancy of a 65-year old is 22.9 and assume that Karen’s 2025 RMD is the 12/31/24 value of the inherited IRA divided by 22.9.
But that would be too easy. Instead, we must go back and figure out what Karen’s baseline life expectancy was in 2021 (the year following the year Linda died) when she was 61, and then subtract 1.0 for each subsequent year up to 2025. The life expectancy of a 61-year old under the current IRS Single Life Table is 26.2. Subtracting 1.0 for each subsequent year gets us to a 22.2-year life expectancy for Karen’s 2025 RMD. Karen’s 2026 RMD will be 21.2 (22.2 -1.0), her 2027 RMD will be 20.2 (21.2 – 1.0), and so on until 2030. In 2030, Karen must take out all of her remaining of the inherited IRA.
The IRS position requiring annual RMDs has been widely criticized. But keep in mind that many plan account beneficiaries subject to the 10-year rule will voluntarily take out more than the yearly minimum distribution over the 10-year period. For those people, the IRS rule is irrelevant. And, those who aren’t already taking out more than the annual RMD should consider doing so. If they don’t, they may be stuck with a large tax bill in the 10th year when the account must be emptied. That’s especially true for beneficiaries like Karen who, because of the delayed effective date of the annual RMD rule, will only be required to take five yearly RMDs instead of nine.
https://irahelp.com/slottreport/how-are-annual-rmds-in-the-10-year-period-calculated/
REQUIREMENT DURING 10-YEAR RULE STANDS
By Sarah Brenner, JD
Director of Retirement Education
On July 18, 2024, the IRS issued final required minimum distribution (RMD) regulations under the 2020 SECURE Act. The newly issued regulations fine-tune existing rules for trust beneficiaries and aggregation of RMDs. They also eliminate burdensome rules for certain spouse beneficiaries and documentation requirements for certain IRA beneficiaries. However, the 260 pages of final regulations keep the majority of the 2022 proposed regulations intact, including one provision that has generated a lot of controversy. The IRS is standing firm and maintaining the requirement that some beneficiaries must take annual RMDs during the SECURE Act’s 10-year payout period.
When the SECURE Act became law in 2020, most nonspouse beneficiaries lost the ability to stretch payments over their life expectancy. Instead, these beneficiaries became subject to a 10-year payout rule. In the wake of the SECURE Act, the IRS proposed regulations took the controversial position that if the account holder died on or after his required beginning date for taking RMDs, then annual RMD payments must continue to the beneficiary during the 10-year period.
The IRS based its interpretation on a long-standing provision in the tax code often referred to as the “at least as rapidly rule”. This rule requires annual RMDs to continue once they have started. Many believed this rule went away with the SECURE Act, but apparently the IRS thought differently. Due to all the confusion its interpretation caused, the IRS waived RMDs during the 10-year period for beneficiaries for the years 2021, 2022, 2023, and 2024.
In the newly released final regulations, the IRS is doubling down on its position that these annual RMDs are required. They must be taken starting in 2025. However, the IRS will not impose penalties for annual RMDs that were not taken for years before 2025.
Example: Karen inherited a traditional IRA from her mother Linda, who died at age 85 in 2020. Under the SECURE Act, Karen is subject to the 10-year rule. She must empty the inherited IRA account by December 31, 2030. The new IRS final regulations also require her to take annual RMDs based on her life expectancy in years one through nine of the 10-year payout period. Due to the IRS waiver of the penalties for missed RMDs in years 2021, 2022, 2023, and 2024, Karen does not need to take RMDs for those years. However, beginning in 2025 she must take an annual RMD for years 2025-2029 from the inherited IRA.
https://irahelp.com/slottreport/irs-issues-final-secure-act-regulations-controversial-annual-rmd-requirement-during-10-year-rule-stands/
ROTH CONVERSIONS AND SIMPLE IRA RMDS: TODAY’S SLOTT REPORT MAILBAG
By Ian Berger, JD
IRA Analyst
Question:
One of our clients wants to cash out his IRA and then roll it into a Roth IRA within 60 days. Can this be done directly, or does it have to be rolled back into an IRA first and then converted?
Thanks,
Samuel
Answer:
Hi Samuel,
A Roth conversion can be done through a direct rollover to the Roth IRA or a 60-day rollover. However, not all custodians will allow the 60-day rollover.
Question:
I read in your book that if I’m still working and reach age 73, I don’t have to withdraw required minimum distributions (RMDs) from my 401(k). But I do have to draw them from my IRAs.
What if I have a SIMPLE IRA at my work? Do I have to withdraw from that while still working?
Thanks,
Chris
Answer:
Hi Chris,
SIMPLE IRAS are tricky because they are sometimes treated like IRAs and sometimes treated like company plans. For the RMD rules, SIMPLE (and SEP) IRAs are treated like IRAs. So, you will need to start RMDs from your SIMPLE at age 73. This is true even if you can delay RMDs from your 401(k) under the “still-working exception.”
PART 1: INHERITED ROTH IRA BY NON-SPOUSE BENEFICIARY – 5-YEAR CLOCK ISSUES?
By Andy Ives, CFP®, AIF®
IRA Analyst
When an IRA owner does a Roth conversion, there is typically a 5-year clock for the earnings on the converted dollars to be tax free. If a person already had a Roth IRA for 5 years AND is over 59 ½, there is no conversion clock to worry about. For these people, Roth IRA distributions will be both tax- and penalty-free.
But we are not concerned about such “qualified status” situations for this article. Here, we are considering non-qualified IRA owners who must abide by the standard 5-year conversion clock – those under 59 ½ and/or who have not held any Roth IRA for 5 years – and the impact on a non-spouse beneficiary.
What if a non-qualified person did a Roth conversion into their first-ever Roth IRA, but then died two years later? Is there any impact on the non-spouse beneficiary of that converted Roth IRA? Yes! A non-spouse beneficiary must abide by the deceased individual’s holding period on that specific inherited IRA. Even if the non-spouse beneficiary had their own IRA for over 5 years, that will not impact the 5-year clock on the inherited IRA.
Fortunately, Roth IRAs have strict ordering rules that are taxpayer friendly. Contributions come out first, then conversions, then earnings. These ordering rules also apply to inherited Roth IRAs. So, if a non-spouse beneficiary inherits a converted Roth IRA in Year 2, any converted dollars (or subsequent contributions made to the account by the original owner before his death) are immediately available to the beneficiary, tax- and penalty-free. A beneficiary would have to burn through all contributions and conversions within the inherited Roth IRA before being able to reach the earnings. If the non-spouse beneficiary is patient – at least for 3 years in this scenario – then even the earnings will eventually be tax-free.
Example: John, age 50, converts his entire $100,000 traditional IRA to a Roth IRA in 2024. John is under age 59 ½, so he must wait 5 years for the earnings on this conversion to be tax-free. Since the conversion was done in 2024, John’s start date is January 1, 2024, and the end of his 5-year conversion clock is January 1, 2029.
Later in 2024 and again in 2025, John makes an $8,000 contribution to this same Roth IRA ($7,000, plus age-50-and-over catch-up). There is also an additional $20,000 of earnings in the account since his original conversion. That brings the total value of his account to $136,000.
Sadly, John dies in late 2025. His beneficiary is his friend Maggie. Maggie establishes an inherited Roth IRA with the assets in 2026. Maggie has her own Roth IRA that she originally opened 10 years ago. However, that Roth IRA has no impact on this inherited account. Also, it does not matter how old Maggie is. Since John was non-qualified, and since his Roth IRA was only open for two years before his death, Maggie must abide by John’s original 5-year conversion clock. Based on Roth IRA distribution ordering rules, Maggie currently has immediate access to the $16,000 of contributions and $100,000 of converted dollars, tax- and penalty-free. If she takes a distribution from the account, these dollars will come out first. However, she must wait until January 1, 2029 before the $20,000+ of earnings will be tax free.
In Part 2 (to be published Monday, July 29), we will discuss the carry-over impacts of the 5-year Roth conversion clock on spouse beneficiaries.
https://irahelp.com/slottreport/part-1-inherited-roth-ira-by-non-spouse-beneficiary-5-year-clock-issues/
IRS “HYPOTHETICAL RMD RULE” PREVENTS SURVIVING SPOUSES FROM AVOIDING RMDS
By Ian Berger, JD
IRA Analyst
One of the more interesting rules (if any could be called “interesting”) from the 2022 IRS proposed regulations requires spouse beneficiaries in some situations to take RMDs (required minimum distributions) before doing a spousal rollover. The IRS calls these RMDs “catch-up” or “hypothetical” RMDs. At first, it was hard to figure out where the IRS was going with this special rule. But after some analysis, it is clear the IRS was trying to close a loophole that spouse beneficiaries could use in very limited situations to avoid RMDs.
Here’s some background. When a surviving spouse inherits an IRA, that spouse can remain a beneficiary or do a spousal rollover (a rollover to her own IRA). There’s another IRS rule that applies when a surviving spouse who remains a beneficiary inherits from an IRA owner who dies before his RMD “required beginning date” (April 1 of the year following the age 73 year). In that case, the spouse beneficiary can elect to stretch RMDs over her single life expectancy or use the 10-year payout rule with no annual RMDs. (This election is available to other “eligible designated beneficiaries” as well.)
So, let’s assume we have surviving spouse Ava who inherits an IRA at age 70 in 2023 from her deceased husband Manuel who died at age 72. Ava decides to remain a beneficiary and elects the 10-year rule. Since Manuel died before his RMD required beginning date, the 10-year rule would normally allow Ava to defer any RMDs until 12/31/33 – the end of the 10-year period.
Ava thinks she can game the system. She could use the 10-year rule (with no annual RMDs) for 8 or 9 years and then do a spousal rollover. That way, she could avoid annual RMDs that she otherwise would have been required to take from her own IRA starting at age 73.
Unfortunately for Ava, some smart IRS employee already thought of this and came up with the hypothetical RMD rule to stymie this scheme. Ava can still do a spousal rollover. But she must first calculate the RMDs she would have taken for each year she was age 73 or older. Like any RMDs, these hypothetical RMDs are not eligible for rollover. So, she must first take those RMDs before she could roll over the remaining part of the inherited IRA in a spousal rollover to her own IRA.
Add this to the list of “too-good-to-be-true” tax avoidance ideas foiled by the IRS.
https://irahelp.com/slottreport/irs-hypothetical-rmd-rule-prevents-surviving-spouses-from-avoiding-rmds/
INHERITED ROTH IRAS AND QUALIFIED CHARITABLE DISTRIBUTIONS: TODAY’S SLOTT REPORT MAILBAG
By Andy Ives, CFP®, AIF®
IRA Analyst
QUESTION:
Do required minimum distributions (RMDs) need to be taken when a non-spouse beneficiary inherits Roth IRA? It seems this has been a point of confusion for some time.
ANSWER:
This is something that confuses a lot of people, and understandably so. The answer is – it depends on who the beneficiary is. Roth IRA owners are always deemed to have died before the required beginning date, regardless of age, because Roth IRAs have no lifetime RMDs. As such, annual RMDs do not apply during the 10-year payout rule when a Roth IRA is inherited by a non-eligible designated beneficiary (NEDB). This allows the inherited Roth IRA to continue to accumulate tax-free for the full 10-year term before the account must be emptied.
Confusion centers around the rules when an eligible designated beneficiary (EDB) inherits a Roth IRA. EDBs are permitted to use their own single life expectancy to leverage the full lifetime stretch on an inherited IRA. While there are no RMDs on an inherited Roth IRA within the 10-year period, there are RMDs on an inherited Roth IRA if an EDB elects the lifetime stretch. While an EDB can avoid the 10-year rule and stretch an inherited Roth IRA over his own single life expectancy, the tradeoff is that RMDs (even if non-taxable) must be taken annually by the EDB, starting in the year after the year of death.
QUESTION:
Can I do a qualified charitable distribution (QCD) to a donor advised fund?
https://irahelp.com/slottreport/inherited-roth-iras-and-qualified-charitable-distributions-todays-slott-report-mailbag/
12 QCD RULES YOU MUST KNOW
By Sarah Brenner, JD
Director of Retirement Education
If you are charitably inclined and have an IRA, a Qualified Charitable Distribution (QCD) can be a great strategy. With a QCD, you can move IRA funds to the charity of your choice tax-free. Here are 12 QCD rules you must know.
1. QCDs are only available to IRA owners or beneficiaries who are age 70½ or older.
2. The maximum QCD amount is capped at $105,000 per person, per year.
3. Under the SECURE 2.0 Act, a one-time QCD of $53,000 (for 2024) can go to a split-interest entity, such as a charitable remainder annuity trust, charitable remainder unitrust or a charitable gift annuity.
4. Donor-advised funds do not qualify for QCDs.
5. A QCD can satisfy your required minimum distribution.
6. No double dipping is allowed! You cannot do a QCD and also take a deduction for the charitable contribution.
7. If you are married, you and your spouse can each contribute up to $105,000 from your own IRAs.
8. The contribution to the charity would have had to be entirely deductible if it were not made from an IRA. You cannot receive a benefit back.
9. The distribution from the IRA to a charity can satisfy an outstanding pledge to the charity without causing a prohibited transaction.
10. The charitable substantiation requirements apply. The charity will send you a written statement/receipt called a “contemporaneous written acknowledgment.”
11. QCDs can be done only with the taxable amounts in your IRAs.
12. QCDs cannot be done from SEP or SIMPLE IRAs that are actively receiving contributions.
https://irahelp.com/slottreport/12-qcd-rules-you-must-know/
EXCESS CONTRIBUTION FIX: SAME IRA, DIFFERENT DOLLARS
By Andy Ives, CFP®, AIF®
IRA Analyst
If I pour too much water into a glass, removing liquid from a different glass does not correct the problem. The excess water must be removed from the “offending” receptacle. Such is the case with excess IRA contributions. If too much money is deposited into a particular IRA, those excess funds must be removed from the same over-flowing IRA to avoid penalties.
Excess IRA contributions can occur in a number of ways. A few examples include:
- Making too much money (being over the income threshold for a Roth IRA) but contributing anyway.
- Not having any taxable compensation (and not having a spouse to make a spousal contribution), but still depositing funds into an IRA.
- Erroneously rolling over a required minimum distribution (RMD) from a work plan – like a 401(k) – into an IRA. The RMD is technically an excess contribution in the IRA.
Regardless of how the excess got into the IRA, it must be removed from that same IRA. But what if the “offending” IRA no longer exists? For example, what if an excess contribution is made to a Roth IRA, but that Roth IRA is subsequently transferred to a new custodian before the excess is identified? Or, what if an excess is made to a traditional IRA, but the entire account is converted to a Roth IRA?
The IRS does not give us direct guidance on how to handle such occurrences. But logic tells us that an honest effort must be made to remove the excess from the offending account. We must “follow the dollars.” If the IRA was transferred, we should remove the excess from the account at the new custodian. If the IRA was converted, the excess should come from the converted Roth. While we follow the dollars and make a concerted effort to remove the excess from the offending IRA, we do not have to withdraw the exact same dollars.
Example: Jerry, a single tax filer, has an annual income that is well over the 2024 Roth IRA phaseout levels ($146,000 – $161,000; or $230,000 – $240,000 for those married, filing joint). Nevertheless, Jerry makes a $7,000 contribution to his existing Roth IRA. Jerry immediately invests the $7,000 within the Roth IRA into an illiquid financial product. Soon after, Jerry realizes his excess contribution mistake. Since he is before the correction deadline (generally October 15 of the year after the excess) he can avoid penalties by removing the excess, plus “net income attributable” (NIA). There will be no early distribution penalty, but the NIA is taxable. But the $7,000 is tied up in an illiquid investment. What to do? Jerry has other items within this same brokerage Roth IRA. He sells enough of a mutual fund within this same Roth IRA to cover the $7,000 excess, plus NIA, and takes an excess contribution withdrawal. All is well.
In the example above, Jerry properly removes the excess contribution from the same Roth IRA. It does not matter that it was “different dollars” from that account. The key is that the distribution came from the offending IRA. If Jerry had another Roth IRA (or a traditional IRA) – even if that other IRA was held at the same custodian – he could not correct his excess contribution problem by withdrawing from one of these different accounts.
https://irahelp.com/slottreport/excess-contribution-fix-same-ira-different-dollars/
IRS GIVES GUIDANCE ON PENALTY-FREE WITHDRAWALS FOR FINANCIAL EMERGENCIES AND FOR VICTIMS OF DOMESTIC ABUSE
By Ian Berger, JD
IRA Analyst
If you take a taxable withdrawal from your IRA or 401(k) (or other company plan) before age 59 ½, you normally have to pay a 10% penalty in addition to taxes. But Congress continues to carve out exceptions to this penalty, and there are now 20 available. In Notice 2044-55, the IRS recently gave us guidance on the new SECURE 2.0 penalty exceptions for withdrawals from IRAs and workplace plans to pay emergency expenses and for victims of domestic abuse. Both are effective this year. (Always think twice about withdrawing from your IRA or company plan. Even if the withdrawal is penalty-free, it reduces the funds available to you at retirement and may be taxable.)
The exception for emergency expense withdrawals covers any “unforeseeable or immediate financial need relating to necessary personal or family emergency expenses.” But this exception won’t be of great help. Only one penalty-free withdrawal per calendar year is allowed, and each distribution is limited to $1,000. Also, once a withdrawal is made, you may not be able to take another one for the next 3 calendar years. You can get around that rule by either fully repaying the previous withdrawal or, after taking the first withdrawal, replenishing your retirement account by making contributions at least equal to the amount of the first withdrawal. Emergency expense withdrawals can be repaid within 3 years to an IRA or workplace plan.
Company plans aren’t required to offer emergency withdrawals. If yours does not and you have an emergency expense, you can take a hardship withdrawal from the plan (if offered) and treat it as a penalty-free emergency withdrawal by claiming the 10% exception on Form 5329. If your plan does offer emergency withdrawals, the plan is allowed to rely on a statement from you certifying that you’re eligible.
What if you have an emergency expense that exceeds $1,000, or you can’t wait 3 years to take a second withdrawal? You can always tap into your IRA at any time or take a hardship withdrawal from your workplace plan (if your plan allows them). But if those withdrawals are from pre-tax funds and you’re under age 59 ½, you’ll have to pay the 10% penalty in addition to taxes (unless another penalty exception applies).
The penalty exception for withdrawals by domestic abuse victims applies to victims of “physical, psychological, sexual, emotional, or economic abuse” by a spouse or domestic partner. To qualify, the withdrawal must be taken within one year of the abusive act. The amount available is more generous than for emergency withdrawals. Up to $10,000 (as indexed for inflation), but no more than 50% of the IRA or vested plan account value, can be taken. Like emergency expense withdrawals, domestic abuse withdrawals can be repaid within 3 years. Plans aren’t required to allow domestic abuse withdrawals, but if they are offered, employees who self-certify to the plan that they meet the eligibility requirements will automatically qualify.
https://irahelp.com/slottreport/irs-gives-guidance-on-penalty-free-withdrawals-for-financial-emergencies-and-for-victims-of-domestic-abuse/
ROLLING OVER YOUR IN-PLAN CONVERSION? WATCH OUT FOR THE RECAPTURE RULE
By Sarah Brenner, JD
Director of Retirement Education
More and more Americans have retirement savings in Roth 401(k)s. With their rising popularity come some complicated tax issues. These funds are often rolled over to Roth IRAs at retirement or when a participant changes job. While the rollover process to the Roth IRA is fairly straightforward, the rules for determining the taxation of these funds when eventually distributed from the Roth IRA can be tricky. In a recent Slott Report post, Andy Ives tackled these rules: https://irahelp.com/slottreport/roth-401k-to-a-roth-ira-rollover-how-does-this-work/.
Special Recapture Rule
On top of these already complicated rules, those who roll over funds from an in-plan 401(k) conversion to a Roth IRA may face an additional unexpected hurdle. (An in-plan conversion is a transfer within the 401(k) from a non-Roth account to a Roth account.) There is an extra rule that can apply to those who are under age 59 ½ and take a distribution of these funds from their Roth IRA within five years from the year of the conversion. If such a distribution is taken, a 10% penalty can apply. This may come as a surprise to many because the penalty applies to the converted funds, despite the fact that they are not taxable when distributed from the Roth IRA.
The IRS calls this a “special recapture rule.” It only applies to funds that were taxable at the time of the conversion and will not apply if one of the exceptions to the 10% penalty (such as disability or death) can be used. This recapture rule follows the funds from the Roth 401(k) to the Roth IRA.
Example: In 2022, Josie, age 40, converts $50,000 in taxable funds as an in-plan conversion from her pre-tax 401(k) account to her Roth 401(k) account. In 2024 Josie changes jobs. She rolls over $56,000 ($50,000 in funds from the in-plan conversion, plus $6,000 in earnings) from her Roth 401(k) plan to her first Roth IRA. Josie then takes a $20,000 distribution from her Roth IRA. Due to the ordering rules that apply to Roth IRA distributions, Josie’s distribution will be considered to be a return of funds from the in-plan conversion, and the $20,000 distribution will not be taxable. However, due to the special recapture rule, it will be subject to a 10% penalty unless an exception applies. This is because Josie is under age 59 ½ and it has been less than five years since she did the in-plan conversion.
The date of Josie’s in-plan conversion is considered to be January 1, 2022 no matter when she does it in 2022. So, if she would have waited to take a distribution of the funds from the in-plan conversion until January 1, 2027, she could have avoided the 10% penalty.
Know the Rules and Avoid Surprises
The best strategy when any funds including in-plan conversions are rolled to a Roth IRA is to hold out for long term. If Roth funds are not touched until retirement, the rules are easy, and the payoff is tax-free distributions. However, sometimes life gets in the way, and the funds are needed sooner than expected. If you are considering a Roth distribution, you do not want to be surprised by unexpected negative tax consequences. This is why being on top of all the complicated Roth rules, including this sneaky special recapture rule, is so important.
https://irahelp.com/slottreport/rolling-over-your-in-plan-conversion-watch-out-for-the-recapture-rule/
ROTH IRA DISTRIBUTIONS AND SELF-DIRECTED IRAS: TODAY’S SLOTT REPORT MAILBAG
By Sarah Brenner, JD
Director of Retirement Education
Question:
I have a question about the Roth IRA distribution ordering rules based on a client’s situation:
1. The client is 45 years old.
2. She has had a Roth IRA open for five plus years.
3. She made a $6,000 contribution to a Roth IRA when she originally opened it.
4. We transferred a Roth 401(k) balance of $10,000 to her Roth IRA in October 2023, with a basis of $9,000 according to the statement from the 401(k) provider.
The client needs to take a distribution from her Roth IRA, and I want to ensure it’s done in the most tax-efficient way possible. I understand that the original contribution of $6,000 will come out without tax or penalty. However, I’m unsure if the Roth 401(k) contribution will also come out without tax or penalty. Are these dollars considered contributions to a Roth IRA, subject to the contribution rules, or do they fall under a different category of contributions requiring a five-year holding period?
Thank you for your assistance.
Matthew
Answer:
Hi Matthew,
The rule for determining taxation of Roth IRA distributions after rollovers from Roth 401(k) plans can be very complicated.
The Roth ordering rules apply. Any contributions come out first and earnings come out last. These rules are applied across the board to include any Roth IRAs that an individual might have. In your client’s situation, I am assuming that there is only one Roth IRA.
The $6,000 Roth IRA contribution will come out tax and penalty-free. Also, the $9,000 in “basis” from the Roth 401(k) plan can also be distributed tax and penalty-free. That would mean that up to $15,000 could be distributed without tax or penalty.
Any earnings in the Roth IRA (including the $1,000 that originated in the plan) would come out last. A distribution of earnings would be taxable and subject to the 10% early distribution penalty. That’s because, even though the Roth five-year holding period is satisfied, the individual is only age 45 (i.e., under 59 ½).
Question:
Are you able to aggregate a self-directed IRA with other traditional IRAs (and withdraw from one traditional IRA) for required minimum distribution (RMD) purposes?
Best,
Adam
Answer:
Hi Adam,
Yes. You are permitted to aggregate RMDs from traditional IRAs (including SEP and SIMPLE IRAs). There is nothing that restricts aggregation of RMDs for self-directed IRAs. In fact, aggregation is often used to satisfy RMD requirements for self-directed IRAs when there are liquidity concerns.
BEER PONG & IRA CUSTODIAL RULES
By Andy Ives, CFP®, AIF®
IRA Analyst
You know the game “beer pong?” Arrange 6 or 10 cups in a triangle, fill each one with a couple of ounces whatever beverage you are enjoying, and your opponent tries to toss a ping-pong ball into one of the cups. If a throw is successful, the contents of that cup are consumed, and it is removed from the table. Rinse the ball off, and it’s your turn to try and toss it into one of the other person’s cups. The first person to eliminate each of his opponent’s cups wins.
What’s interesting is the number of permutations and in-house rules that can apply. Here at Casa Ives, we require a “re-rack” into a diamond shape when there are four cups left. Also, your throwing elbow cannot go beyond the end of the table. Some people forbid bouncing the ping-pong ball. Others say a bounced ball into a cup means the thrower gets to choose a second cup to be consumed and removed from the table. On and on the different rules go.
Such is the case with IRA custodians. There are different in-house rules for different scenarios. For example, titling of an inherited IRA can be handled in multiple ways. The deceased IRA owner’s name must remain on the inherited IRA account and the account title must indicate that it is an inherited IRA by using the words “beneficiary” or “inherited IRA.” However, there is no set format or hard-and-fast rules dictating EXACTLY how an inherited IRA is to be titled. As long as the deceased IRA owner’s name remains on the account and it’s clear that it is an inherited IRA, then all is well. A properly titled inherited IRA could look something like: “John Smith IRA (deceased 11/27/22) F/B/O John Smith, Jr., Beneficiary”
Another example of custodians handling things differently is when it comes to their policies allowing spousal rollovers even though a trust is named as IRA beneficiary. If a trust is named, then we would expect to see an inherited IRA for the trust established. After all, the rules are clear. If a trust is named as the beneficiary, the inherited IRA should be set up for the trust. However, if the surviving spouse is the sole beneficiary of the trust, and if that person has total control of the trust assets, in many private letter rulings (PLRs), we have seen the IRS allow the surviving spouse to do a spousal rollover of the assets into her own IRA. But this is not automatically allowed. It is the custodian’s decision to allow the spousal rollover or not. If the custodian refuses, it may be necessary to get your own PLR from the IRS.
Similarly, an “estate bypass” is something a custodian may or may not allow, based on their in-house rules. When an estate becomes an IRA beneficiary, we would typically see an inherited IRA set up for the estate. But depending on the applicable payout structure, this could force the estate to remain open for many years. To be able to close the estate, some custodians allow inherited IRAs to be established for the estate beneficiaries. The downside is, these accounts will still be bound by the payout rules applicable to the estate – like possibly the 5-year rule. Again, this is at the custodian’s discretion, so if they refuse, a PLR may be in order.
Not all IRA rules are fixed across the board. There is some flexibility among custodians. Hopefully we all find ourselves dealing with helpful and agreeable partners. But if you do run into a custodial brick wall, maybe a game of beer pong is in order. Just watch that elbow.
FIVE THINGS TO KNOW ABOUT ROTH 401(K)S
By Ian Berger, JD
IRA Analyst
A recent survey found that over 80% of 401(k) plans now offer employees the option of making Roth 401(k) employee contributions. More and more employees are now taking advantage of that opportunity. (In this article, I use the term “Roth 401(k) contributions” to also include Roth employees made to 403(b) and municipal 457(b) plans.) Here are five things to keep in mind about Roth 401(k)s if your plan offers them:
- They have great tax benefits. Although Roth 401(k) contributions are made with after-tax salary, the contributions grow tax free, and earnings also come out tax free after a five-year holding period is satisfied and after the employee has turned age 59 ½ (or is disabled).
- They are subject to annual dollar limits. Like pre-tax 401(k) deferrals, Roth 401(k) contributions are subject to an annual dollar limit – for 2024, $23,000 and an additional $7,500 if age 50 or older. However, Roth 401(k) contributions are aggregated with pre-tax deferrals, so you can only make a total of $23,000 (or $30,500) of contributions between pre-tax and Roth.
- They are not aggregated with IRA or Roth IRA contribution dollar limits. Making a Roth 401(k) contribution has no impact on your ability to make Roth IRA (or traditional IRA) contributions. So, if you’re over age 50 and qualify for both a Roth 401(k) and a Roth IRA contribution, you can make a total 2024 contribution of up to $38,500 ($30,500 + $8,000).
- They have certain advantages compared with Roth IRAs. If you don’t have the funds to maximize both your Roth 401(k) and Roth IRA contributions, there are several good reasons to fund your Roth 401(k) first. First, Roth 401(k) funds may offer more protection against creditors than Roth IRAs. If the Roth 401(k) is part of an ERISA plan, you have an unlimited shield from creditors’ claims. By contrast, Roth IRAs only give you the creditor protection available in the state where you live, which can be less than ERISA protection. Second, most plans allow employees to borrow against their Roth contributions, but Roth IRA owners can’t borrow against those funds. Third, many 401(k) plans will match Roth 401(k) employee contributions, but your custodian won’t match your Roth IRA. Finally, unlike Roth IRA contributions, Roth 401(k)s have no annual income limits (although the plan may restrict contributions made by highly-paid employees.)
- They have certain disadvantages compared with Roth IRAs. In some respects, however, Roth IRAs may be a better option. Roth IRAs offer unlimited investment choices, but Roth 401(k)s are limited to the plan’s more limited options. Roth 401(k) accounts usually can’t be touched by employees until they turn age 59 ½ (or leave employment), while Roth IRAs are always available (although earnings may be taxable and subject to penalty). Finally, Roth IRA distributions that don’t meet the conditions for a “qualified distribution” are subject to favorable ordering rules, but non-qualified Roth 401(k) distributions must meet a pro-rata rule that causes a part of the distribution to be taxable.
SIMPLE IRA RMDS AND IRS LIFE EXPECTANCY TABLES: TODAY’S SLOTT REPORT MAILBAG
By Ian Berger, JD
IRA Analyst
Question:
Does a SIMPLE IRA owner who is over age 73 and still works for the same company that sponsors the SIMPLE IRA plan have to take an RMD (required minimum distribution)? He does not own any of the company.
Answer:
Yes. SIMPLE and SEP IRA owners cannot use the “still-working exception” to delay RMDs until retirement. For this purpose, SIMPLEs and SEPs are treated like IRAs – not plans. So, the first RMD would be due for the year the SIMPLE IRA owner turns age 73, regardless of employment status with the company.
Question:
Hi,
I am trying to get information regarding an RMD for 2024. My husband, 12 years older than me, died in September 2023 at the age of 93. He had two IRAs, and I am the sole beneficiary of both. I was able to transfer them into my own name. For 2023, he had taken his RMD before he died.
I am not able to find out which IRS table I have to use for the 2024 RMD. Is it the Uniform Life Table or the Single Life Expectancy Table? No matter where I check on the IRS website or any other website, I can’t find the answer. Would you have an answer for me? I would really appreciate this.
Thank you very much,
Gisela
Answer:
Hi Gisela,
Once you did a spousal rollover of your husband’s IRA to your IRA, you became the owner of those funds. So, you would use the Uniform Lifetime Table to calculate your RMD for 2024 (and subsequent years). Use the combined balance on 12/31/23 to calculate your total 2024 RMD.
DON’T OVERLOOK YOUR BENEFICIARY FORM
By Sarah Brenner, JD
Director of Retirement Education
You have been contributing to your IRA for years. The market is up, and you are watching those investments grow. Maybe you have rolled over funds to your IRA from your company plan. You may now have a significant balance. So far, you have taken smart steps toward a secure future. Don’t stop your careful planning there.
While you have been saving for retirement, you may not have thinking about what happens to your IRA after your death. An IRA is not only an important part of your retirement, it is also a significant part of what you will leave to your heirs. You will want to carefully consider what will happen to your IRA after you die.
Your will does not determine who gets your IRA. Many people believe that their will determines who inherits their IRA. This is a common misconception. Your will has no effect on who will receive your IRA assets because IRAs are generally not part of the probate estate. In other words, IRAs pass to beneficiaries outside the will. Even a perfectly drafted will by an expert attorney will have no control over what happens to your IRA after your death.
Don’t overlook the beneficiary form. The main estate planning document for IRAs is the beneficiary designation form. This form, not a will, will determine who inherits your IRA funds. This is a form that you most likely completed with the IRA custodian when you established your IRA. On a standard beneficiary designation form, an IRA owner names one or more primary beneficiaries. Additionally, the IRA owner usually will also name a contingent beneficiary. Contingent beneficiaries inherit the IRA funds if the primary beneficiaries predecease the IRA owner.
Update your beneficiary form for life events. You may have established your IRA a long time ago. IRAs have been around for decades and a lot has happened! Consider contacting the custodian of your IRA (or checking online) to see if your beneficiary designation form is up-to-date and accurately reflects your intentions. If you have divorced, you will want to be sure your ex-spouse is not still listed on the beneficiary designation form. This does happen and sometimes this oversight ends up in a court battle, as the ex-spouse claims IRA funds that the IRA owner may have wanted to go to a current spouse or to children. Avoid this legal mess by making any needed changes now.
Do regular beneficiary form checkups. Problems can occur when an IRA beneficiary designation form is not clear. Are all the listed beneficiaries on your form clearly identified, along with the share of the IRA to which they are entitled? Spending some time now to be sure that everything on the beneficiary designation form is accurate will avoid significant problems for your heirs in the future. Sometimes, the IRA custodian cannot find a beneficiary designation form. This can happen for a variety of reasons, including bank mergers and takeovers. If you discover this now, the solution is easy: You can simply complete a new beneficiary form. If no beneficiary form can be found after your death, there will be more serious problems as the IRA will be treated as if no beneficiary was named and will be paid out to the default beneficiary listed in your IRA document (usually your estate or spouse).
You have worked hard to build a balance in your IRA. Taking a few simple steps now to be sure that your beneficiary form is completed, up-to-date, and accurate will ensure that those funds are passed safely to your intended heirs.
PARTICIPATION IN MULTIPLE WORK PLANS – IT CAN BE DONE!
By Andy Ives, CFP®, AIF®
IRA Analyst
It is perfectly acceptable for a person to participate in multiple work plans in the same year (even at the same time). For example, a 401(k) and a SEP. Or maybe a 401(k) and another 401(k). However, care must be taken to follow IRS contribution limits and other guidelines. Unfortunately, people try to circumvent these rules all the time. Sometimes it feels like everyone is working an angle, and boy, does it get tiresome.
For example, a recent conversation revealed a person who owned two businesses and was looking to open a third. These were not 50-employee or even 10-employee shops. Just small operations with a handful of total workers. His scheme: open three SEPs, one SEP for each business, and fully contribute the 2024 maximum of $69,000 to all plans for himself. NO DEAL. Based on his ownership of all companies, he (as business owner) could only contribute a TOTAL of $69,000 across all plans. Of course and as expected, the wriggling and squirming to find a loophole followed. “What if I transfer partial ownership to my wife?” Still, no deal. Stop trying to beat the system.
In another scenario, a greedy dentist wanted to stick it to his dental hygienists and staff. His idea was to open Business Entity #1 in which he, the dentist, was the only employee. He wanted to start a Solo 401(k) for this business and plow a bunch of cash into it. Meanwhile, he would open another business to house his staff. There would be no retirement plan offered under Business Entity #2. Again, NO DEAL. Since he would fully own both companies, if Business Entity #1 offered a retirement plan, that same plan must also be offered to eligible employees of the other business. (Part of me hopes that guy gets tooth decay.)
You can maximize participation in multiple plans only if the businesses are considered unrelated. For example, assume you are an employee at ABC Widget Co. with no stake in ownership. You may participate in the ABC Widget 401(k) and, if you make a good salary, can defer up to $23,000 into the plan in 2024. And if you are age 50 or older, you can leverage the $7,500 catch-up provision to drive salary deferrals up to $30,500. In addition, if ABC Widget Co. offers a match and/or a profit sharing component to the 401(k), or if the plan allows for after-tax (non-Roth) contributions, total 2024 contribution could reach $76,500! ($69,000 annual cap, plus $7,500 catch-up.)
Assume in your spare time, when not being an exemplary employee at ABC Widget Co., you also run your own consulting business called “Honest Answers.” ABC Widget Co. and Honest Answers are completely independent of each other. You could open a retirement plan for Honest Answers and, since I am sure the business would be profitable, plow additional dollars into this second plan. You choose a SEP, which can only accept employER contributions. As business owner, you could plow another $69,000 into your retirement.
The key points are: the businesses cannot be considered related by ownership under IRS rules. Also, the 2024 annual salary deferral limit is $23,000 plus $7,500 catch-up. That amount is aggregated across all plans. Since you used the full amount of salary deferrals in the ABC Widget 401(k), you cannot make any additional 2024 salary deferrals to any other plan. SEP contributions are technically made by the employer, so all is well. If Honest Answers elected to install a 401(k), the $69,000 maximum might still be attained via a profit sharing contribution or even after-tax (non-Roth) contributions. (There are many ways to fund a 401(k).)
Recognize that participation in multiple workplace retirement plans is certainly allowed. But the rules must be followed. For those with the means to do so, congratulations on your success! For those looking to game the system…go get a root canal.
IRA ROLLOVERS AND REQUIRED MINIMUM DISTRIBUTIONS: TODAY’S SLOTT REPORT MAILBAG
QUESTION:
At age 80, after I take my required minimum distribution (RMD), can I then do a rollover from my IRA to my Roth IRA? If I can, is there a limit as to how much? I know that it is all taxable.
Thanks,
John
ANSWER:
John,
Once your RMD has been satisfied, yes, you can then do a Roth conversion for whatever amount you want. There is no limit on how much can be converted. Just be aware that income from Roth conversions can impact things like income-related monthly adjustment amount (IRMAA) brackets.
QUESTION:
I turn 73 in October 2024. Do I have to wait until my birthday in October, when I actually turn 73, to take my RMD amount for the year? Or does any withdrawal I make in 2024 count towards the RMD?
Thank you,
Liliana
ANSWER:
Liliana,
You do not have to wait until your actual 73rd birthday to satisfy your RMD. The first dollars withdrawn from the account are deemed to count toward the RMD. So, any distributions you take in calendar year 2024, even if taken in the months before your 73rd birthday, will count toward your RMD for the year.
By Andy Ives, CFP®, AIF®
IRA Analyst
A WISH LIST FOR THE IRS BENEFICIARY RMD FINAL REGULATIONS
After more than two years, we might actually soon be getting answers from the IRS on several important unanswered questions concerning required minimum distributions (RMDs) for those who inherit IRAs or company plan accounts.
The 2019 SECURE Act completely changed the RMD rules for many beneficiaries of retirement accounts. Previously, any individual living beneficiary could stretch RMDs over their lifetime. But the new law said that most non-spouse IRA or plan beneficiaries who inherited after 2019 could no longer do the “stretch” and were instead subject to a 10-year payment rule. Only “eligible designated beneficiaries” (EDBs) could continue to do the stretch.
The SECURE Act left many unresolved beneficiary RMD issues. The IRS issued proposed regulations in February 2022 that tried to clear things up, but in several respects only made things worse. Recently, the IRS said it expects final regulations to be in place in time for determining RMDs for 2025 and subsequent years. If the IRS is true to its word, then we should see final rules by the end of 2024.
What are the unresolved RMD issues that should be addressed in the final regulations?
The big one is whether certain beneficiaries subject to the 10-year rule must also take annual RMDs in years 1-9 of that period. In the 2022 proposed regulations, the IRS surprised everyone by saying that, in addition to the 10-year payout, annual RMDs are required during the 10-year term if the IRA owner had died on or after the date his RMDs were required to begin. (For IRA owners, that required beginning date is generally April 1 of the year after the year the owner turns age 73.)
The IRS position led to widespread criticism and confusion. Recognizing this, the IRS has excused annual RMDs for years 2021-2024 for all retirement account beneficiaries who inherited after 2019 and are subject to the 10-year payout. (The IRS has not excused lifetime RMDs, RMDs by EDBs, or RMDs by beneficiaries who inherited before 2020.) The IRS has not tipped its hand as to whether the final rules will require annual RMDs within the 10-year period starting in 2025.
Hopefully, the final regs will also clarify whether the annual RMD requirement for years 1-9 of the 10-year period (in addition to the 10-year payout rule) applies in two other situations. The first is when a child reaches age 21 after having inherited a retirement account before that age from a parent who had not started RMDs. The other is when a “successor beneficiary” inherits from an EDB who had previously inherited from an original IRA owner who died before starting RMDs.
Finally, let’s hope the final guidance scraps a strange proposed rule that applies when an EDB inherits from a younger account owner who has already started RMDs. In that case, the beneficiary can use the account owner’s (longer) life expectancy in calculating RMDs, resulting in lower RMDs. So far, so good. But the rule goes further and requires the beneficiary to empty the account when the beneficiary’s – not the account owner’s – life expectancy runs out. This rule would be almost impossible for elderly beneficiaries to comply with.
Keep checking The Slott Report, and we’ll let you know when the IRS final regulations finally come out and what they say.
By Ian Berger, JD
IRA Analyst
THE SLOTT REPORT TAKES ON AI
We are surrounded with information – and misinformation. Finding accurate up-to-date facts is increasingly difficult. Do an internet search and you will likely run into obsolete websites that have not been updated in years, paywalls demanding you subscribe before getting access, and sites completely generated by AI with very limited human involvement.
We at the Slott Report are the exception to this dismal reality. Several times a week, our retirement account experts (actual humans!) write blogs tackling some of the most complicated issues affecting retirement accounts.
We get many questions about the SECURE Act and its impact on inherited retirement accounts. We were curious how AI would handle these inquiries. So, we asked AI the following question:
“How does the SECURE Act affect inherited IRAs received by a non-spouse beneficiary?”
Here is the response from AI:
“They must be distributed within 10 years, regardless of the beneficiary’s age.”
At first glance this may seem like the right answer. After all, the SECURE Act did replace the stretch IRA with a new 10-year rule for many IRA beneficiaries. However, that is not the full story. Nothing in the tax code is that simple.
While the majority of non-spouse beneficiaries are subject to the 10-year rule, some are not. In fact, some beneficiaries are not subject to the 10-year rule specifically because of their age. Due to their age, some living non-spouse beneficiaries are eligible designated beneficiaries (EDBs) who can still get the stretch and are not required to use the 10-year rule. Examples include both minor children of the account owner and beneficiaries who are not more than 10-years younger than the deceased account owner.
Non-spouse beneficiaries who are not living, breathing entities are subject to a completely different set of rules. The 10-year rule does not apply. Instead, those beneficiaries (such as an estate) would be subject to either the five-year rule or annual distributions based on the remaining single life expectancy of the deceased IRA owner (the “ghost” life rule).
AI can be a valuable tool, but it has its limits. Using AI might be helpful, but it can fall significantly short of providing all the important details. And what you don’t know can hurt your IRA. When it comes to accurate, up-to-date information on retirement accounts, you can count on the living, breathing humans who bring you the Slott Report to give you the full and accurate story.
By Sarah Brenner, JD
Director of Retirement Education
SECURE ACT REGULATIONS AND INHERITED IRAS: TODAY’S SLOTT REPORT MAILBAG
Question:
When can we expect final SECURE Act regulations from the IRS?
Mike
Answer:
Hi Mike,
No one knows for sure. However, there is now some hope that these may be coming sooner rather than later. In recently released Notice 2024-35, the IRS said that final regulations are anticipated to apply for determining RMDs for 2025 and beyond. If the IRS is true to its word, then final regulations would be issued by the end of 2024.
Question:
Good afternoon,
We have received conflicting guidance and advice regarding an inherited IRA situation and were hoping you could help. A client born in 1962 passed away in 2011 and left his IRA to his father. The father was born in 1940 and died in 2012. Upon his passing, he left the IRA to his wife (the original client’s mother). She was born in 1942 and just passed away in May 2024, leaving the IRA to her other son (born in 1964).
The wife had been taking annual required minimum distributions (RMDs) from the inherited IRA based on her late husband’s life expectancy. We are wondering whether her surviving son is allowed to continue stretching RMDs or must empty the IRA account in 10 years.
One source told us the SECURE Act rules do not apply because both the original owner and original beneficiary passed away prior to the new law, meaning the surviving son continues to take annual RMDs from the inherited IRA based on his late father’s remaining life expectancy. Another source told us the SECURE Act rules do apply, and the surviving son has to drain the IRA completely within 10 years, but does not have annual RMDs in years 1 through 9.
Knowing you all are THE industry experts, we are hoping you can break the tie on what the technical rule is here. Thanks for your help.
Amit
Answer:
Hi Amit,
This is a little tricky! The IRA was inherited prior to the SECURE Act, so the original beneficiary (the father) was able to stretch RMDs over his life expectancy. This payout method would have continued for the first successor beneficiary (his wife).
However, with her death in 2024 the SECURE Act would apply for the second successor beneficiary (the surviving son). That would mean the inherited IRA would be subject to the 10-year rule and must be emptied by 12/31/34.
In addition, the IRS proposed regulations would require annual RMDs in years 1-9 of the 10-year period based on the original beneficiary’s (the father’s) life expectancy. Due to all the confusion over this requirement, the IRS has so far waived it for 2021, 2022, 2023, and 2024. It remains to be seen what will happen in future years.
By Sarah Brenner, JD
Director of Retirement Education
Follow Us on X: @theslottreport
https://irahelp.com/slottreport/secure-act-regulations-and-inherited-iras-todays-slott-report-mailbag/
ROTH 401(K) TO A ROTH IRA ROLLOVER: HOW DOES THIS WORK?
As retirement account questions go, this is the shortest inquiry with the longest answer. When asked what factors to consider and what 5-year clocks apply with a Roth 401(k) to Roth IRA rollover, I take a big breath and say, “Pull up a chair.” There are a number of variables to determine. Probing questions must be posed before any guidance can be given.
First, we must determine if this is a “qualified distribution” or not. A qualified distribution from a Roth 401(k) means the person had the Roth 401(k) for 5 years AND is age 59 ½ or older. If either of these hurdles come up short, then we have a NON-qualified distribution. Assume a person meets the requirements for a qualified distribution. In that case, upon rollover, all former Roth 401(k) dollars go into the Roth IRA as basis and are available for immediate distribution tax-free. Essentially, all dollars go into the Roth IRA as one big contribution, and a person always has access to their contributory Roth IRA funds.
What about the 5-year clock? The 5-year holding period is the period applicable to the Roth IRA. So, even if this was the first Roth IRA a person ever had and it was just opened to receive the Roth 401(k) dollars, a qualified distribution from the plan means all dollars rolled into the Roth IRA are available. If this was a brand-new Roth IRA and the person never had a Roth IRA before, there would be a 5-year wait for any subsequent EARNINGS to be tax-free, but the rollover dollars are accessible.
What if a Roth 401(k) participant could NOT check both boxes – meaning they were either under 59 ½ or did not have the Roth 401(k) for 5 years? Then it would be a non-qualified distribution. With a non-qualified distribution, former Roth 401(k) dollars “maintain their same character” when they roll into the Roth IRA. Salary deferrals into the plan will dump into the Roth IRA “contribution bucket” as basis, and Roth 401(k) earnings will dump into the Roth IRA earnings bucket. As with a qualified distribution, the 5-year holding period will be the period applicable to the Roth IRA.
Qualified vs. non-qualified distributions from a plan is an important distinction. If a plan participant held their Roth 401(k) for only four years (non-qualified), but elected to roll the Roth 401(k) into a brand new Roth IRA (and this person never had a Roth IRA before), then they would lose the 4 years…because the Roth IRA clock takes precedence. On the flip side, if this same person already had a Roth IRA for 5 years, then the former Roth 401(k) dollars would essentially zoom forward and adopt the more advanced 5-year Roth IRA period. Upon rollover, the Roth IRA 5-year clock takes precedence, whether that is beneficial or not.
In summary, when rolling Roth 401(k) dollars to a Roth IRA, the following variables must be considered:
- Is this a qualified distribution (age 59 ½ AND 5 years in the Roth plan), or is it non-qualified?
- How long was the Roth IRA held? (The Roth IRA clock will take precedence.)
- A qualified distribution means all plan dollars come over as basis.
- With a NON-qualified distribution, the rollover dollars “maintain their character” when dumping into the Roth IRA contributions and earnings buckets.
By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on X: @theslottreport
https://irahelp.com/slottreport/roth-401k-to-a-roth-ira-rollover-how-does-this-work/
GOVERNMENT REPORT HIGHLIGHTS CONFUSION OVER 401(K) DISTRIBUTION OPTIONS
A recent government report highlights how confused 401(k) participants are when they have to decide what to do with their savings after leaving employment.
Tax rules require401(k) plans (and 403(b) and governmental 457(b) plans) to provide a written notice when participants become entitled to a distribution that can be rolled over. The notice must explain they can do a direct rollover to an IRA or another plan and that a mandatory 20% will be withheld from their payment if they don’t do a direct rollover.
The IRS provides model notices that plans can use to satisfy this notice requirement. Plans typically send the model notice as an attachment to the distribution application form after a participant requests a distribution. But these model notices have been widely criticized as too complicated for the average plan participant to understand.
The SECURE 2.0 Act required the General Accountability Office (GAO) to issue a report to Congress on the effectiveness of the notices and to make recommendations on how to improve them. The GAO surveyed over 1,000 401(k) participants who, between 2019 and 2022, were eligible to do a rollover to another plan.
The GAO report results are not surprising, but are still disturbing.
The survey showed that over 80% of eligible participants did not know that they have four options after leaving an employer: Keep their funds in the existing plan; roll over the funds to a new employer’s plan; roll over the funds to an IRA; or take a lump sum distribution. Over 50% were unaware of the “keeping funds in the plan” option. The GAO said this lack of knowledge was probably because IRS regulations do not require that the notice given out to participants must include information about this option.
In addition, about 40% did not understand three basic tax consequences about distribution options: First, participants can retain the tax-deferred status of their savings by doing a rollover to another retirement account or by leaving funds in the plan. Second, if they take a lump sum distribution, they are subject to a mandatory 20% tax withholding and a 10% penalty if under age 59 ½. Third, if they do an indirect rollover, they must add additional funds to make up for withheld taxes and deposit the savings into a new account plan within 60 days to avoid taxes and possible penalties.
Particularly troubling is that only about 35% of participants received a notice before they made a decision about their 401(k) funds.
The bottom line is that the retirement plan distribution rules are extremely challenging. If you are leaving your employer and have 401(k) savings, by all means seek help from an experienced financial advisor.
By Ian Berger, JD
IRA Analyst
Follow Us on X: @theslottreport
THE AGE 55 EXCEPTION AND ROLLOVERS OF ROTH IRAS: TODAY’S SLOTT REPORT MAILBAG
Question:
Can an individual who is using the age 55 exception to the 10% early distribution penalty roll over a part of a 403(b) account to an IRA and leave a portion in the 403(b) to take penalty-free withdrawals?
Thank you,
Jamie
Answer:
Hi Jamie,
There is no rule under the tax code that says the age 55 exception can’t still be used after a portion of the account balance has been previously rolled over to an IRA. However, it’s possible the 403(b) plan may have an administrative rule that bars participants from taking partial distributions. You should check with the plan’s administrator to confirm any plan-specific guidelines.
Question:
Can a Roth IRA be rolled into a Roth 401(k)?
Answer:
No. Only pre-tax IRA funds can be rolled over to workplace plans. Roth IRAs can only be rolled over to other Roth IRAs.
https://irahelp.com/slottreport/the-age-55-exception-and-rollovers-of-roth-iras-todays-slott-report-mailbag/
FIVE RMD FACTS EVERY IRA OWNER SHOULD KNOW
If you have an IRA and you are approaching retirement age, you have probably heard the term “required minimum distribution” (RMD). But do you know the details of how the rules work and what they mean for you? Here are five facts about RMDs that every IRA owner should know.
- If you have a traditional IRA (including a SEP or SIMPLE IRA), you must take an RMD for each year beginning for the year you reach age 73. If you are still working, that will not delay when you must take an RMD from any IRA. If you have a Roth IRA, no RMDs are required during your lifetime. Converting your IRA to Roth IRA would result in no further RMDs being required in your lifetime.
- The deadline for taking your first RMD is your required beginning date, which is April 1 of the year following the year you reach age 73. This is the only time you will have beyond the calendar year to take your RMD. The deadline for taking your RMD for years after you reach age 73 is December 31. If you delayed taking your first RMD until April 1 of the following year, you will then need to take another RMD by December 31 to satisfy the requirement for the second year.
- RMDS are calculated separately for each IRA, but then may be aggregated and the total amount taken from one IRA. You may not take the RMD for an IRA from your company plan or from your Roth IRA. You can aggregate traditional IRAs that you own. You can separately aggregate IRAs inherited from the same person. Your RMD may not be rolled over to another IRA or converted to a Roth IRA. Once you have satisfied your RMD for the year for your IRA, you may then roll over or convert the IRA.
- Your RMD is calculated by dividing your December 31 prior-year IRA balance by a life expectancy factor. The year-end balance may need to be adjusted in rare circumstances like rollovers or transfers that are outstanding on December 31 of the prior year. Life expectancy is determined using the Uniform Lifetime Table, unless the sole beneficiary of your IRA for the entire year is your spouse who is more than ten years younger than you. If that is the case, you would use the Joint Life Expectancy Table. Special rules apply for death and divorce when it comes to using this table.
- If you fail to take your RMD by the deadline there is 25% penalty on the amount of the shortfall. If you miss your RMD for the year, you should take it as soon as possible. You should consult with your tax advisor about filing Form 5329 and asking for a waiver of the penalty. The IRS will waive the penalty for good cause.
https://irahelp.com/slottreport/five-rmd-facts-every-ira-owner-should-know/
SIMPLE PLAN CONTRIBUTION LIMITS: INCREASED FOR MANY
By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on X: @theslottreport
We have written about this subject in the past (December 2023), but as is our philosophy here, learning is all about repetition, repetition, repetition. Surprisingly (he says with tongue firmly planted in cheek), not everyone reads every Slott Report entry. For some, this could be the first time they are hearing about these new SIMPLE plan contribution rules.
The basics: SIMPLE plans are available for companies with 100 or fewer employees who received at least $5,000 in pay from the company in the prior year. They were originally designed to be easier to administer than a 401(k), hence the name. SIMPLE plans allow for both employee and employer contributions, and those dollar amounts have always been clear. For example, the maximum SIMPLE annual salary deferral for 2024 is $16,000. For those who are age 50 or older, the 2024 catch-up contribution amount is $3,500.
Now enter the confusing parts.
SECURE 2.0 made some significant changes to the SIMPLE IRA plan contribution limits. For businesses with 25 or fewer employees, starting in 2024, both the “normal” salary deferral limit and the age-50-and-over catch-up limit are increased by 10% above the standard amounts listed in the preceding paragraph. This pushes the 2024 limits to $17,600 and $3,850, respectively.
What about businesses with 26 employees or more? These larger companies (26 – 100 employees) can elect the extra 10%, but only under two possible conditions:
- If they provide a 4% (instead of 3%) matching contribution, OR
- If they provide a 3% (instead of 2%) across-the-board contribution.
So, while the SIMPLE contribution limits are reported as $16,000 and $3,500, there is a good chance that a significant number of employees can actually contribute more.
The next layer of confusion with SIMPLE plans is, of course…how do we determine how many employees the business actually has? IRS Notice 2024-02, released on December 20, 2023, explains how to determine the official employee headcount:
- The increased SIMPLE contribution limits apply automatically in the case of an eligible employer that has no more than 25 employees who received at least $5,000 of compensation for the preceding calendar year.
- For an employer that has more than 25 employees who received at least $5,000 of compensation for the preceding year, the increased limits apply only if the employer makes an election for the increased limits to apply. To determine the number of employees with at least $5,000 of compensation, all employees employed at any time during the calendar year are considered, regardless of whether they are eligible to participate in the SIMPLE IRA plan.
Bottom line: If you have any affiliation with a SIMPLE plan, be sure to recognize that the 2024 contribution limits have been increased by 10% for many (but not all) participants.
https://irahelp.com/slottreport/simple-plan-contribution-limits-increased-for-many/
WHEN A REVERSE ROLLOVER MAKES SENSE
By Ian Berger, JD
IRA Analyst
Follow Us on X: @theslottreport
In a famous “Seinfeld” episode, George Costanza, unemployed, living with his parents and without a girlfriend, decides to do the opposite of what he would normally do. It pays off for him big time as he lands a front office job with the New York Yankees (after criticizing the owner during a job interview) and begins dating a beautiful woman after approaching her at the coffee shop.
Doing the opposite can also make sense when it comes to rollovers. A rollover between 401(k) funds and an IRA usually involves moving the funds from the plan to the IRA. But sometimes a “reverse rollover” – from an IRA to a 401(k) – is a smart move.
Beware, however, that there are a few roadblocks to doing reverse rollovers. Company plans like 401(k)s aren’t required to allow rollovers into the plan, although many do. So, before withdrawing your IRA, check with your plan administrator or HR rep. Also, the tax code only allows reverse rollovers of pre-tax IRA funds. You can’t do reverse rollovers of Roth IRA and traditional after-tax IRA accounts.
The biggest advantage of doing a reverse rollover is to minimize – or avoid altogether –taxes when you convert after-tax IRA funds to a Roth IRA through a “backdoor” conversion. The tax code’s pro-rata rule looks at all of your non-Roth IRA accounts (including SEP and SIMPLE IRAs) as of December 31 of the year you do the conversion. If you have any pre-tax funds on December 31, a portion of the conversion will be taxable. But if you have rolled over your pre-tax IRAs to a 401(k) during the year, you’ll be left with only after-tax funds as of December 31, and the conversion can be tax-free. And, you still can “reverse the reverse rollover,” by rolling the 401(k) funds back to the IRA in the next year.
There are other good reasons to move your IRA to your plan:
- If you work past April 1 following the year you turn age 73 and don’t own more than 5% of the company sponsoring the plan, RMDs from your pre-tax 401(k) dollars can be delayed until you leave your job.
- If you leave your job at age 55 or older (the earlier of age 50 or 25 years of service for certain public safety employees), you can receive your 401(k) without paying the 10% penalty.
- If the plan allows, you can borrow from your 401(k) plan.
- Depending on your state’s laws, your retirement savings may be better protected from creditors while in a 401(k) than while in an IRA.
But, there are also many good reasons to keep your money in the IRA. These include: earlier access to your funds, easier coordination with estate planning; being able to do QCDs (qualified charitable distributions); wider investment options; and the ability to aggregate RMDs.
So, check with a knowledgeable financial advisor before pulling the trigger on a reverse rollover.
https://irahelp.com/slottreport/when-a-reverse-rollover-makes-sense/
NET UNREALIZED APPRECIATION AND QUALIFIED CHARITABLE DISTRIBUTIONS: TODAY’S SLOTT REPORT MAILBAG
By Sarah Brenner, JD
Director of Retirement Education
Follow Us on X: @theslottreport
Question:
I need guidance on a new client with the following information:
- Is age 55;
- Has a $700,000 ESOP in a company that he separated from over 10 years ago; and
- Wants diversification.
Since he separated from the company over 10 years ago and is now age 55, would he be eligible for the following: Have the ESOP transferred to a traditional brokerage account, pay income tax on the cost basis, pay no early withdrawal 10% penalty, diversify the stock, and pay long-term capital gain tax via the Net Unrealized Appreciation (NUA) tax break provision on the appreciated value.
Thanks, Eric
Answer:
Hi Eric,
If there is highly appreciated company stock in a plan, it is always worth at least considering the NUA strategy. That strategy allows long-term capital gains treatment on the appreciation of plan-held company stock that is distributed in kind from the plan to a nonqualified account. The cost basis is included in taxable income and any appreciation after distribution is subject to the standard rules for capital gains treatment.
To qualify for NUA, there must be a triggering event. Both separation from service and reaching age 59 ½ are triggering events. You must also have a lump sum distribution. This means that all funds in like plans must be emptied in one year. Any distributions taken after the triggering event but before the year of the lump sum distribution would kill the opportunity to do NUA. Also, some ESOPs (especially with privately-held companies) may impose restrictions on distributions or on the period stock can be held outside the ESOP in a way that makes the NUA tax break impossible or limits its advantages.
You mention that the individual is age 55 now, but separated from service 10 years ago. That would mean that the cost basis would be taxable and subject to the 10% early distribution penalty. The age 55 exception only applies to those who separate from service in the year they reach age 55 or later and that is not the case here.
Hopefully, this points you in the right direction. Any potential NUA transaction should be discussed in detail with the client. There are many nuances and finer points that should be addressed thoroughly. We like to say that NUA is an art and not a science.
Question:
If the estate is the beneficiary of an IRA, can the estate do a qualified charitable distribution (QCD) with the year of death RMD?
Thanks!
Answer:
It is possible for some beneficiaries to do a QCD from an inherited IRA. However, it will not work for an estate. That is because to do a QCD you must be age 70 ½ or older. An estate cannot satisfy this requirement.
https://irahelp.com/slottreport/net-unrealized-appreciation-and-qualified-charitable-distributions-todays-slott-report-mailbag/
WHAT YOU NEED TO KNOW ABOUT COMMUNITY PROPERTY AND YOUR IRA
By Sarah Brenner, JD
Director of Retirement Education
Follow Us on X: @theslottreport
What do you get when community property mixes with your IRA? Well, you will discover that the results can be confusing. Here are some facts every IRA owner should know.
Community Property States
The community property system has been adopted by nine states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Alaska has adopted an optional community property system. Are you off the hook when it comes to community property if you currently live in another state? Not so fast. Society is increasingly mobile. It is not uncommon during a lifetime to move to and from community property states.
How Community Property Works
Community property is everything a husband and wife own together. In general, this includes all money earned and property acquired during the marriage. How do your IRAs fit in? Assets held in an IRA will be community property to the extent that contributions were made to the account and earnings accrue during the marriage.
It’s important to keep in mind that community property rules can vary from state to state. For example, California community property law is not the same as Arizona community property law.
When are community property issues likely to come up with your IRA? Well, generally, there are two significant times where you might encounter these issues as an IRA owner. When it comes to determining who gets your IRA after a divorce or death, community property rules will come into play.
Divorce
In community property states, a spouse may have a community property interest in the other spouse’s IRA. By doing a trustee-to trustee transfer, this interest can be moved from one spouse’s IRA to the other spouse’s IRA after a divorce without negative tax consequences. You will need a court order for this transfer to be done.
Naming IRA Beneficiaries
Since community property law can dictate who gets your IRA after death, it must be taken into account when you name a beneficiary on an IRA. In a community property state, state law may recognize your spouse as the beneficiary of some or all of your IRA. Therefore, you may need to get your spouse’s written consent to name someone else as the beneficiary of your IRA.
Some IRA custodians have beneficiary designation forms with language for spousal consent to name a non-spouse beneficiary. Others do not. Even if a beneficiary designation form does include spousal waiver language, some experts caution against relying on it. To be sure that all goes as planned, the safest approach is for you and your spouse to each have your own separate counsel and for an experienced attorney to draft the necessary documents.
Expert Advice Needed
Now you know that community property can raise some complicated issues where your IRA is concerned. It is best to be prepared. If you have questions about how community property rules affect your IRA, a good place to start is a consultation with a knowledge financial or tax advisor who knows both the IRA rules and the property transfer rules.
https://irahelp.com/slottreport/what-you-need-to-know-about-community-property-and-your-ira/
ED SLOTT’S ELITE ADVISOR GROUP℠ MEETS IN INDIANA
By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on X: @theslottreport
Ed Slott’s Elite IRA Advisor Group℠ gathered in Indianapolis last week for another successful conference. Over 350 member advisors from across the country spent two intense days of training, covering topics ranging from SECURE 2.0 provisions taking effect in 2024 to fixing excess contributions. The overarching theme of the seminar was “schemes and scams.” Guest speakers discussed different types of scams and what to watch out for. Attending advisors shared real-life stories of how their clients have been targeted and what hurdles had to be overcome to protect accounts. Here we discuss some of the topics of conversation from the conference.
From a recent article on the “Checkpoint” tax service, “An estimated $10 billion from 2.6 million fraud incidents was lost in 2023…but the [Federal Trade Commission] estimates actual losses are as high as $48 billion.”
In the “Identifying Schemes and Scams” portion of the program, we covered seven red flags along with specific situations where the red flag scams resulted in prohibited transactions and significant penalties. These “red flags” included such things as: using multiple entities to conceal illegal transactions within an IRA; making unrealistic claims; and using legal tax breaks to make an investment opportunity sound legitimate. The ultimate point of this section of the program was to emphasize the old adage: “If it sounds too good to be true, it probably is.” In fact, a quote included in the training manual reads as follows:
“There is no secret trick that can eliminate a person’s tax obligations. People should be wary of anyone peddling any of these scams.” – [Former] IRS Commissioner Douglas Shulman, “IRS Issues Dirty Dozen List of Tax Scams”
Apart from the schemes and scams, we also covered the different provisions of SECURE 2.0 that came on-line in 2024. (SECURE 2.0 included 92 sections with staggered effective dates.) Some of the rules include three new ways to potentially access retirement dollars while avoiding the 10% early distribution penalty (Emergency expenses, domestic abuse, and “in-plan emergency savings accounts”). 529-to-Roth IRA rollovers were discussed, as was the ability to exempt Roth plan dollars – like in a 401(k) – from the lifetime required minimum distribution calculation.
One of the more focused parts of the conference had to do with Roth SEP and Roth SIMPLE contributions. Roth contributions to both types of plans were technically available in 2023, as per SECURE 2.0. However, actual implementation proved difficult. For example, how are Roth SEP contributions reported? Since custodians needed further guidance from the IRS on how to handle such contributions before they could proceed, the new Roth options were simply not offered. That guidance arrived in the form of IRS Notice 2024-2, which we have written about in the past here in the Slott Report. We now know the answer to the above question: Roth SEP contributions are reported on a 1099-R using code 2 or 7 in box 7.
The Ed Slott’s Elite IRA Advisor Group℠ training programs are always jam-packed with important information, intense conversation, networking opportunities and entertainment. Indianapolis proved to be no different. Another successful conference is in the books, and our member advisors fanned back out across the country armed with new information to help guide and protect their clients.
https://irahelp.com/slottreport/ed-slotts-elite-advisor-group%e2%84%a0-meets-in-indiana/
QUALIFIED CHARITABLE DISTRIBUTIONS (QCDS) AND SOLO 401(K) PLANS: TODAY’S SLOTT REPORT MAILBAG
By Ian Berger, JD
IRA Analyst
Follow Us on X: @theslottreport
Question:
Can a QCD (qualified charitable distribution) be made from a 401(k) plan?
Thanks!
Answer:
No, QCDs can only be made from IRAs and inactive SEP or SIMPLE IRAs. One possible workaround would be for you to roll over all or a portion of your 401(k) funds into an IRA and then do a QCD from the IRA.
Question:
We have a client who is self-employed. He has a 401(k) plan for himself and his wife. Is this 401(k) protected under ERISA from creditors?
Answer:
A solo 401(k) plan where just the business owner and spouse participate is not an ERISA plan, so it does not have ERISA protection against non-bankruptcy creditors. The plan would only have whatever creditor protection is available under state law. (The federal Bankruptcy Code does protect solo plan accounts in bankruptcy.) Hiring additional employees would turn the solo plan into an ERISA plan with ERISA creditor protection. But having an ERISA plan would also introduce new administrative requirements.
https://irahelp.com/slottreport/qualified-charitable-distributions-qcds-and-solo-401k-plans-todays-slott-report-mailbag/
A CHEAT SHEET FOR IRA BENEFICIARY RMDS
By Ian Berger, JD
IRA Analyst
Follow Us on X: @theslottreport
It’s been over four years since the SECURE Act upended the rules for beneficiary IRA required minimum distributions (RMDs), and there’s still plenty of confusion about the new rules. The IRS did give us proposed SECURE Act regulations in February 2022, but those rules still haven’t been finalized. They have also raised a lot of new questions.
Here’s a cheat sheet on how the rules currently stand for IRAs inherited after 2019. (Pre-SECURE Act rules apply for IRAs inherited before 2020.)
Two Important Questions
First, we always need to answer two important questions:
- Did the IRA owner die before or after his required beginning date (RBD) for RMDs? The RBD is April 1 of the year following the year IRA owner reaches his first RMD year. (The first RMD year is age 73 under SECURE 2.0.) A Roth IRA owner is always considered to have died before her RBD.
- Is the IRA beneficiary an eligible designated beneficiary (EDB), a non-eligible designated beneficiary (NEDB) or a non-designated beneficiary (NDB). An EDB is a surviving spouse of the IRA owner; a minor child (under 21) of the IRA owner; a chronically-ill or disabled person; or someone not more than 10 years younger than the IRA owner. An NEDB is an individual beneficiary who isn’t an EDB. An NDB is a beneficiary who isn’t a person (e.g., an estate, a charity or certain trusts).
Traditional IRA Owner Died Before Required Beginning Date OR
Roth IRA Owner Died At Any Time
EDB: A non-surviving spouse EDB can elect to stretch RMDs over her life expectancy or have the 10-year payment rule apply. If the 10-year rule is elected, the entire account must be emptied by 12/31 of the 10th year following the year of death. However, no annual RMDs are required during the 10-year period. Note: There are different rules for surviving spouse EDBs who inherit after 2023.
NEDB: The 10-year rule applies, but no annual RMDs are required.
NDB: The 5-year rule applies. So, the entire account must be emptied by 12/31 of the 5th year following the year of death, but no annual RMDs are required during the 5-year period.
Traditional IRA Owner Died On or After Required Beginning Date
EDB: Stretch RMDs apply. But if the EDB is older than the deceased IRA owner, the EDB can use the deceased person’s older life expectancy in calculating RMDs. (However, the inherited IRA must be emptied when the EDB’s life expectancy runs out.)
NEDB: The IRS proposed regs say that both the 10-year rule applies and annual RMDs during the 10-year period are required. However, because of widespread confusion, the IRS has waived the annual RMD requirement for 2021, 2022, 2023 and 2024 in this situation.
NDB: AnnualRMDs must continue over the deceased IRA owner’s remaining single life expectancy had he lived (the “ghost rule”).
https://irahelp.com/slottreport/a-cheat-sheet-for-ira-beneficiary-rmds/
YOUR RMD IS NOT ELIGIBLE FOR ROLLOVER
By Sarah Brenner, JD
Director of Retirement Education
Follow Us on X: @theslottreport
If you are at retirement age, you might be at a high risk for excess contributions due to rollover mistakes. This is because of the rule that says that the required minimum distribution (RMD) for the year cannot be rolled over. In fact, the RMD for the IRA must be taken before any of the funds in the IRA are eligible for rollover. For example, an RMD must be taken before doing a Roth IRA conversion.
If you mistakenly roll over an RMD, you will end up with an excess contribution. Very often, many people think they can fix the problem by simply taking a distribution from the IRA that received the failed rollover. Not so fast! It’s not that easy. The RMD was distributed. That part went fine. However, because the RMD should not have been rolled over, it is considered an excess contribution and must be fixed as an excess contribution.
Sometimes the failed rollover is not due to a mistake on your part. Sometimes the mistake may be the fault of the plan administrator handling a rollover from a company plan to your IRA. If ineligible dollars are included in the amount rolled over to the IRA, an excess contribution in the IRA is the result.
Roth IRA conversions are considered rollovers. If you mistakenly include your RMD in a conversion instead of taking it first, you will end up with an excess contribution in your Roth IRA.
Correcting an RMD That Becomes an Excess Contribution
If you have mistakenly rolled over your RMD, do not panic. This is a mistake that can be fixed without penalty if you act in a timely manner. If you correct the excess contribution, by removing it, plus net income attributable, by October 15 of the year following the year of the contribution, you can avoid the 6% excess contribution penalty.
Example: Carla, age 75, has not taken her 2024 RMD of $9,000. She rolls over her entire IRA balance to a new IRA. Carla’s RMD of $9,000 is considered an excess contribution in the receiving IRA. This problem cannot be fixed by Carla simply taking a distribution of $9,000 from the new IRA. She will have to correct the excess contribution. If Carla removes the $9,000, plus the net income attributable as a corrective withdrawal by October 15, 2025, she will avoid the 6% penalty that applies to excess contributions.
https://irahelp.com/slottreport/your-rmd-is-not-eligible-for-rollover/
ROLLOVERS AND SUCCESSOR BENEFICIARY RULES: TODAY’S SLOTT REPORT MAILBAG
By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on X: @theslottreport
QUESTION:
My client is terminating employment and rolling over the funds from his 401(k). He was told that the funds must be rolled over to a “rollover IRA” and kept separate from any other IRA funds that he has. He already has another IRA, and he just wants to roll over the funds to that IRA. Is that allowed?
Thanks,
Jim
ANSWER:
Jim,
Yes, your client is allowed to roll his 401(k) into his existing IRA. There is no downside to commingling former 401(k) dollars with IRA dollars.
QUESTION:
I inherited an IRA from my brother. I have named my wife as the beneficiary on this IRA. Can she do a spousal rollover to her own IRA after my death?
ANSWER:
No, a spousal rollover is not an option. If your wife were to inherit this inherited IRA from you, that would make her a “successor” beneficiary. As a successor, she must follow the applicable rules established by the SECURE Act for deaths after 2019. Regardless of who the successor beneficiary is, the 10-year rule will apply, and the successor will continue with the same required minimum distribution (RMD) schedule as the original beneficiary in years 1 – 9. (The account must be emptied by the end of year 10.) For situations where the 10-year rule had already begun with the first beneficiary, the successor can only continue whatever time remains on the original 10-year period.
https://irahelp.com/slottreport/rollovers-and-successor-beneficiary-rules-todays-slott-report-mailbag-2/
ONE 60-DAY ROLLOVER PER YEAR?
By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on X: @theslottreport
SCENARIO: In one calendar year, Jessie completes the following transactions:
1. Takes a partial distribution from her 401(k) and does a 60-day rollover to an IRA.
2. Does a 60-day rollover from one traditional IRA to another traditional IRA.
3. Takes another partial distribution from her 401(k) and, within 60 days, deposits the cash directly into a Roth IRA.
4. Takes a distribution from her traditional IRA and, within 60 days, deposits the cash directly into a Roth IRA.
5. Closes out her 401(k) and does a 60-day rollover of remaining plan assets to a traditional IRA.
QUESTION: Has Jessie violated the one-rollover-per-year rule?
ANSWER: No, she has not.
EXPLANATION: The one-per-year rollover rule works as follows: First, it is true that a person can do only one 60-day rollover per year. The rule gets even more strict when you realize it is applicable across all accounts. Also, “per year” is not a calendar-year 12-months, but a rolling 365 days. For example, if a person receives an IRA distribution on May 1 and does a 60-day rollover to another IRA, she is not eligible to do another 60-day rollover from any IRA to another IRA until the following May 1. (Note that the 12-month period begins with the date the funds are received by the account owner.)
However, the finer details of the one-per-year 60-day rollover rule are important so as to be able to maximize the legal movement of funds. The following rollovers ARE subject to the rule:
- IRA to IRA
- Roth IRA to Roth IRA
The following rollovers are NOT subject to the rule:
- Plan to IRA
- IRA to Plan
- IRA to Roth IRA (a Roth conversion)
In fact, of the five transactions completed by Jessie listed above, only item #2 was subject to the one-rollover-per year rule. An analysis of each transaction is as follows:
1. Plan-to-IRA rollover. Not subject to the one-per-year rule. A person can do as many plan-to-IRA 60-day rollovers as they wish.
2. IRA-to-IRA rollover. As mentioned, this is Jessie’s only transaction subject to the rule. She cannot do another IRA-to-IRA (or Roth IRA-to-Roth IRA) 60-day rollover for 365 days.
3. Plan-to-Roth IRA. This transaction qualifies as a valid Roth conversion.
4. IRA to Roth IRA. Also, a valid Roth conversion.
5. Plan-to-IRA. No restrictions on these transactions.
https://irahelp.com/slottreport/one-60-day-rollover-per-year/
401(K) RMDS IN THE YEAR OF RETIREMENT
By Ian Berger, JD
IRA Analyst
Follow Us on X: @theslottreport
Here’s a question we get asked often: Say you retire in the year you turn age 73 (or in a later year) and you want to roll over your 401(k) funds to an IRA. Do you have to take a required minimum distribution (RMD) before rolling over the remaining funds?
The answer is yes, but at first glance that doesn’t seem right. After all, RMDs normally don’t need to start until April 1 following your age 73 year (or April 1 following the year of retirement if you’re using the “still-working exception” to delay RMDs). That April 1 is considered your required beginning date (RBD) for RMDs. If the 401(k)-to-IRA rollover takes place before the RBD, why would an RMD be required?
It would be required because of the interplay between three tax rules. First, the first funds paid to you in a year for which an RMD is required are considered part of the RMD (the “first-dollars-out rule”). Second, the first year for which an RMD is required is not the year of the RBD – it’s the year of retirement (that is, the year before the year of the RBD). Third, RMDs can never be rolled over. Putting all these rules together means that the first dollars received in the year you retire on or after age 73 are part of the RMD and aren’t eligible for rollover.
What if the RMD is rolled over? Then, you have an excess IRA contribution. But that’s not as bad as it sounds. As long as the rolled-over amount – along with earnings or losses attributable to the excess amount (“net income attributable” or “NIA”) – are withdrawn from the IRA by October 15 of the year after the year of the rollover, you won’t have a penalty.
Example: Tara participates in her company’s 401(k) plan. She uses the still-working exception to delay plan RMDs beyond age 73. In 2025 at age 74, Tara retires and wants to roll over her 401(k) balance of $400,000 to an IRA. She is aware that her RBD for plan RMDs is not until April 1, 2026. So, she rolls over the entire $400,000. However, because her 2025 RMD (assume $15,000) wasn’t eligible for rollover, she now has an excess contribution in the IRA. Tara can fix the error without penalty by withdrawing the $15,000, along with the NIA, from the IRA by October 15, 2026.
Is there a workaround for Tara to avoid taking a 2025 RMD from her 401(k) in calendar-year 2025 if she retires that year? Yes, by keeping her 401(k) funds in the plan and delaying the rollover until 2026. But then she would have to take two taxable RMDs in 2026 – the 2025 RMD and the 2026 RMD – before rolling over the rest of her funds.
https://irahelp.com/slottreport/401k-rmds-in-the-year-of-retirement/
INHERITED IRAS AND QUALIFIED CHARITABLE DISTRIBUTIONS: TODAY’S SLOTT REPORT MAILBAG
By Sarah Brenner, JD
Director of Retirement Education
Follow Us on X: @theslottreport
Question:
My brother died in 2020 and made me the beneficiary of an IRA he inherited from my sister who died in 2017. Can I continue to stretch the payments from this inherited IRA? If not, how soon do I have to empty it?
Thanks,
Dave
Answer:
Hi Dave,
It sounds like you are a successor beneficiary on this inherited IRA. Your brother was the original beneficiary, and he would have been eligible to use the stretch.
You inherited after the SECURE Act, so as a successor beneficiary you are subject to the 10-year rule and must empty the account by the end of 2030. Under the IRS proposed regulations, you would be required to continue the annual RMDs that your brother was taking when he was the beneficiary and subject to the stretch. However, due to continued confusion over the regulations, those RMDs have been waived by the IRS for years 2021 through 2024.
Question:
I am beneficiary of an IRA inherited from my father who died over 10 years ago. I’ve been taking RMDs as required. Since I’m over age 70 ½, I did some QCDs. I received proper documentation from the charities.
I use tax software to prepare my taxes. It’s not allowing me to recognize the QCDs. Is there a problem with my doing a QCD from an inherited IRA?
Thanks for your help!
Answer:
There is no problem with doing a QCD from an inherited IRA. If you a beneficiary who is over age 70 ½, that is allowed.
It is hard to say what the problem is with the tax software. There is nothing on the Form 1099-R which the IRA custodian generates when a QCD is done that would distinguish a QCD from any other distribution. You must claim the QCD on your tax return. Most tax software programs should be able to handle this.
https://irahelp.com/slottreport/inherited-iras-and-qualified-charitable-distributions-todays-slott-report-mailbag-2/
3 QUESTIONS TO ASK TO DETERMINE IF AN HSA IS RIGHT FOR YOU
By Sarah Brenner, JD
Director of Retirement Education
Follow Us on X: @theslottreport
The cost of healthcare continues to climb. Are you frustrated with higher premiums and out-of-pocket costs? You are not alone. You may be looking for new strategies to handle these expenses. If you have not considered a Health Savings Account (HSA) before, now may be the time. Here are 3 questions to ask to determine if an HSA is right for you.
1: Who is eligible to have HSA? To be eligible to make an HSA contribution, under the current rules you must be covered by a high deductible health plan (HDHP). The rules are very specific about what plans qualify. Here are the details for 2024:
Year | Self-Only HDHP Minimum Deductible | Self-Only HDHP Maximum Out-of-Pocket Expenses | Family HDHP Minimum Deductible | Family HDHP Maximum Out-of-Pocket Expenses |
2024 | $1,600 | $8,050 | $3,200 | $16,100 |
If you have questions as to whether your plan qualifies, you should ask your employer or health insurance provider. You cannot contribute to an HSA once you are enrolled in Medicare. However, you can keep your existing HSA and you can still take tax-free distributions for qualified medical expenses.
2: How do the HSA contribution rules work? Your contribution limit will depend on your age and the type of health insurance you have. The HSA contribution limits are indexed for inflation. Here are the limits for 2024:
Year | Self-Only HDHP under age 55 | Self-Only HDHP age 55+ | Family HDHP under age 55 | Family HDHP age 55+ |
2024 | $4,150 | $5,150 | $8,300 | $9,300 |
There are currently no income limits for HSA contributions, and you do not need to have earned income to contribute. If you make an HSA contribution, you may deduct that contribution regardless of how high your income is and regardless of whether you take the standard deduction or itemize deductions on your tax return.
3: How do the HSA distributions rules work? You can take tax-free distributions from your HSA for qualified medical expenses, including those of a spouse or dependent. This is true even if your spouse or child is not covered under the HSA compatible HDHP. You can take a tax-free distribution from an HSA to reimburse yourself for qualified medical expenses in prior years as long as the expenses were incurred after you established your HSA and you have proof of those expenses.
https://irahelp.com/slottreport/3-questions-to-ask-to-determine-if-an-hsa-is-right-for-you/
FUNDAMENTALS OF THE LIFETIME RMD
By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on X: @theslottreport
We answer some pretty complex IRA and retirement plan questions. Our newsletters and other Slott Report entries can get into the weeds on some tricky topics. The thing is, when you spend all your time in the deep end, it’s easy to forget there are new swimmers in the shallows, testing the waters for the first time. Additionally, seasoned financial advisors are not immune to forgetting some basic concepts. Since lifetime required minimum distributions (RMDs) are so prevalent, a refresher course is in order.
When a traditional IRA owner or retirement plan participant reaches a certain age (or employment status, discussed below), then RMDs must begin. That age has been adjusted a few times over the last couple of years, and it will move again (to age 75) in 2033. To best understand what RMD age applies to you, use your date of birth, as follows:
Born 1950 or earlier? Your RMD age was 70 ½ or 72.
Born from 1951 – 1959? Your RMD age is 73.
Born 1960 or later? Your RMD age is 75.
Your first RMD year is the calendar year in which you turn one of the ages listed above. It does not matter if your actual birthday is January 1 or December 31. The year you turn the applicable RMD age is your first year for RMDs.
The first RMD can be taken any time during the year. You do not need to wait until your birthday. Additionally, the first RMD (and the first RMD only) can be delayed until April 1 of the year after the first RMD year. This is known as the “required beginning date,” or “RBD.” The purpose of the delay is to give first-time RMD takers a few extra months to figure things out. But be forewarned. If you delay your first RMD until the following year, you will have to take two RMDs in that second year – the first RMD by April 1, and the second RMD by December 31.
If your work plan – like a 401(k) – offers the “still-working exception,” and if you are still working, you can delay your first RMD until the year you separate from service. This final year of employment will act in the same manner as a standard first RMD year (like turning age 73). Meaning, the first RMD from the work plan can be delayed until April 1 of the year after you retire/separate from service. (Note that the still-working exception is NOT available to more than 5% owners of the company sponsoring the 401(k). It also does NOT apply to IRAs.)
IRAs can be aggregated for RMD purposes. RMDs from all of a person’s IRAs must be calculated separately, but the total combined RMD amount can be taken from one or a combination of the IRAs. But not all RMDs from all accounts can be aggregated. Inherited IRAs cannot be aggregated with a person’s own IRAs. Also, work plan RMDs – again, like a 401(k) – cannot be aggregated with your IRA. Finally, spouses cannot aggregate RMDs with RMDs from the other spouse’s IRAs.
The Uniform Lifetime Table is typically used to calculate lifetime RMDs. (The Joint Life and Last Survivor Table is only for spouses with more than a 10-year age difference, and the Single Life Table is for beneficiaries.) Look up your age and find the corresponding factor. Divide that factor into the December 31 balance from the previous year, and voila, your RMD is calculated. (Now just be sure to take it before whichever deadline applies!)
https://irahelp.com/slottreport/fundamentals-of-the-lifetime-rmd/
ROTH IRA DISTRBUTION RULES AND COMBINING IRAS: TODAY’S SLOTT REPORT MAILBAG
By Ian Berger, JD
IRA Analyst
Follow Us on X: @theslottreport
Question:
Can you please clarify a question I have about whether I should take a Roth IRA withdrawal?
I am much older than age 59 ½, and my first Roth IRA was opened over 20 years ago. I now own a second Roth which holds recently converted funds from my 403(b) account. I am planning to make added Roth conversions over the next couple of years and pay the tax on these conversions. If I make a subsequent withdrawal from my Roth IRA, will it be tax- and penalty-free? I think so from what I have read, given my age and the fact that my first Roth account was opened over 5 years ago. However, some commentators seem to think that any Roth withdrawal must wait 5 years from the conversion in order to avoid being taxed on earnings. I don’t think this is correct and hope you can help.
Paul
Answer:
Hi Paul,
The Roth IRA distribution rules are confusing. You are correct that any Roth IRA withdrawal you take will be completely free of taxes and the 10% early distribution penalty. That’s because you are over 59 ½ and have had a Roth IRA for at least 5 years. The rule about waiting 5 years to withdraw a Roth conversion only applies to the 10% penalty (not taxation of earnings) and doesn’t apply to folks over 59 ½ like you.
Question:
I have a client with a traditional IRA and a SIMPLE IRA opened in 2020 that she is no longer contributing to. Should these accounts remain separate? She also has a small 401(k) that she needs to roll over to an IRA. Can all of these accounts be consolidated?
Answer:
There is no reason why the traditional IRA and SIMPLE IRA can’t be combined. (SIMPLE IRAs can be rolled over to non-SIMPLE accounts after 2 years of participation in the SIMPLE.) And, the 401(k) can also be rolled over into the combined traditional/SIMPLE account.
https://irahelp.com/slottreport/roth-ira-distrbution-rules-and-combining-iras-todays-slott-report-mailbag/
IRS WAIVES 2024 RMDS FOR IRA BENEFICIARIES SUBJECT TO THE 10-YEAR RULE
By Ian Berger, JD
IRA Analyst
Follow Us on X: @theslottreport
If you’re an IRA beneficiary subject to the 10-year payout period and would have had a 2024 required minimum distribution (RMD), you’re in luck. In IRS Notice 2024-35, issued yesterday (April 16), the IRS said it would excuse those RMDs.
The SECURE Act provided that most non-spouse beneficiaries of IRA owners (or plan participants) who died in 2020 or later could no longer stretch RMDs over their lifetime. Instead, these “non-eligible designated beneficiaries” became subject to a 10-year payment rule. In its proposed SECURE Act regulations (from February 2022), the IRS surprised everyone by saying that, in addition to the 10-year payout, annual RMDs are required in years of 1-9 of the 10-year period if the IRA owner had died on or after the date his RMDs were required to begin. That required beginning date (RBD) is generally April 1 of the year after the year the owner turns 73.
The IRS position led to widespread criticism and confusion. Recognizing this, the IRS previously excused 2021, 2022 and 2023 annual RMDs for beneficiaries of IRA owners who died in 2020 after the RBD. It also previously waived 2022 and 2023 annual RMDs for beneficiaries who inherited in 2021 after the owner’s RBD. And, it has excused 2023 annual RMDs for beneficiaries who inherited in 2022 after the owner’s RBD.
With Notice 2024-35, this relief within the 10-year payout period is extended even further. The new Notice adds another year of relief by waiving 2024 annual RMDs for beneficiaries of IRA owners who died in 2020, 2021 or 2022 after the RBD. It also excuses 2024 RMDs within the 10-year period for beneficiaries of owners who died in 2023 after the RBD.
So, if you inherited after 2019 and are subject to the 10-year payout rule, you aren’t required to receive annual RMDs for any year before 2025. Even so, it may be a good idea to voluntarily take IRA withdrawals while tax rates are low. Putting off distributions also could mean you’ll face a larger tax bill at the end of the 10-year period.
Keep in mind that the new IRS Notice does not affect lifetime RMDs, RMDs from inherited IRAs by “eligible designated beneficiaries,” or RMDs by beneficiaries who inherited before 2020. It only applies to those beneficiaries with annual RMDs within the 10-year period.
Notice 2024-35 also suggests that, after more than two years, the IRS may finally be ready to finalize its February 2022 proposed regulations sometime later this year.
https://irahelp.com/slottreport/irs-waives-2024-rmds-for-ira-beneficiaries-subject-to-the-10-year-rule/
TWO RMD STRATEGIES TO AVOID IRMAA
By Sarah Brenner, JD
Director of Retirement Education
Follow Us on X: @theslottreport
You have carefully saved for retirement and now you have accumulated a substantial amount of funds in your IRA. At some point the funds that you have been putting away for years must come out. When you reach age 73 you must take a required minimum distribution (RMD) for that year and for every year thereafter.
You may be concerned about the tax hit that the RMD will bring. Besides the RMD itself being taxed, there is a ripple effect when an RMD is taken. An RMD is included in income for the year it is taken. A bump up in your income can negatively affect the availability of deductions and can impact the taxation of Social Security. One significant negative impact of an RMD may be increased Medicare costs. This is often not paid the attention it deserves by many IRA owners until it is too late.
Increased Medicare Costs
Without careful planning, your RMD can result in much higher healthcare costs. This is because the RMD is included in your modified adjusted gross income (MAGI) that is used to determine your Medicare Part B and Part D costs two years down the road. The income-related monthly adjustment amount (IRMAA) sliding scale is a set of tables used to adjust Medicare premiums. The higher the MAGI, the higher the IRMAA. There are no phaseout ranges. If you have MAGI that is $1 over the limits, you will have to pay the full extra amount. This can be a significant amount.
How can you avoid falling into the trap of higher Medicare costs due to RMDs? Here are two strategies to consider:
1: Convert to a Roth IRA.
One way to avoid IRMAA problems due to RMDs is to eliminate RMDs. If you are in your early sixties you may want to consider converting to a Roth IRA sooner rather than later. You will want to get the conversion done before the income from the conversion would affect your MAGI for Medicare purposes. (Income in the year you turn 63 impacts IRMAA brackets in the year you turn 65.) By doing so, you can then minimize the impact of RMDs on Medicare costs. This is because RMDs will not be needed. RMDs are not required from Roth IRAs during the Roth IRA owner’s lifetime. In addition, any qualified Roth IRA distributions are not included in MAGI for Medicare purposes.
2: Do a QCD.
If you are already taking RMDs, a qualified charitable distribution (QCD) is another strategy you may consider to minimize the impact of RMDs from an IRA on Medicare costs. With a QCD, you can transfer up to $105,000 annually from your IRA to a charity tax-free. A QCD can satisfy your RMD for the year and it is not included in MAGI for determining Medicare costs. Keeping the RMD amount out of MAGI can result in big savings. This is not the case if you take your RMD and then donate to charity and claim a charitable deduction. With that approach, the RMD would still be included in MAGI.
https://irahelp.com/slottreport/two-rmd-strategies-to-avoid-irmaa/
REQUIRED MINIMUM DISTRIBUTIONS AND QUALIFIED CHARITABLE DISTRIBUTIONS: TODAY’S SLOTT REPORT MAILBAG
By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on X: @theslottreport
QUESTION:
Dear IRA Help,
My mother passed away in April of 2023 and no required minimum distribution (RMD) was taken. The entire IRA account was paid out to the charity that was the beneficiary. Was there a requirement to take the RMD?
Joe
ANSWER:
Joe,
Our condolences on the loss of your mother. Yes, she did have a year-of-death RMD, and the year-of-death RMD is the responsibility of the beneficiary. Since the beneficiary, in this case, was the charity, and since the charity received a full distribution of the IRA, then all is well. The 2023 year-of-death RMD was included in the lump sum distribution to the charity.
QUESTION:
Can qualified charitable distributions (QCDs) be taken from an inherited IRA? I have my own traditional IRA that I have been taking QCDs from. If I take the QCDs from my inherited IRA only, do I need to wait to take my RMD from the traditional IRA until after the QCDs have cleared from the inherited IRA?
ANSWER:
Inherited IRAs operate completely independently from a person’s own IRAs. Meaning, RMDs between the two cannot be aggregated. Distributions from one account have no impact on distributions from the other. As such, you do not need to wait for any transactions to clear from one account before transacting on the other. Assuming you meet all the normal QCD requirements (like being age 70 ½), then yes, QCDs can be done from your inherited IRA. As mentioned, the timing of these QCDs has no impact on the RMD requirements from your own IRA. The only overlap is that the total annual QCD limit is $105,000 for 2024, aggregated across all IRA accounts.
https://irahelp.com/slottreport/required-minimum-distributions-and-qualified-charitable-distributions-todays-slott-report-mailbag/
THE WISE SHOPPER – ROTH CONVERSIONS
By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on X: @theslottreport
Imagine walking through a grocery store, intent on purchasing a specific item. As you turn down an aisle, little colorful tags proclaiming “Special Deal” and “Buy 1, Get 1” protrude from each shelf. In anticipation of your item being offered at a discounted price, you get a little bounce in your step. Sure enough, as you reach the section that displays the one product you came here to buy, the tag says, “On Sale.” Jackpot! And if this is a non-perishable item that can be safely stored at home or frozen, there is a good chance you might load the grocery cart. (After all, isn’t that the business model for bulk warehouse stores?) And who doesn’t like saving a few bucks?
Guess what’s on sale right now? Taxes. The taxable income brackets for 2024 (ordinary income tax rates) are as follows:
Marginal Married Filing
Tax Rate Joint Single
10% $0 – $23,200 $0 – $11,600
12% $23,201 – $94,300 $11,601 – $47,150
22% $94,301 – $201,050 $47,151 – $100,525
24% $201,051 – $383,900 $100,526 – $191,950
32% $383,901 – $487,450 $191,951 – $243,725
35% $487,451 – $731,200 $243,726 – $609,350
37% Over $731,200 Over $609,350
It’s that last bracket that’s interesting – 37%. Did you know the top bracket from 1944 to 1963 was 91% – and even went as high as 94%? In 1964 it “dropped” to 77%, and from 1965 to 1981 it was 70%. Granted, not everyone falls into the top bracket, but compared to the last 100 years, taxes today are being offered at a discount. But this sale won’t last forever. On January 1, 2026, the rates return to their pre-Tax Cuts and Jobs Act levels of 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.
So, what’s the point? Roth conversions! Would you rather have a $100,000 traditional IRA or a $100,000 Roth IRA? Of course, the answer is a Roth IRA. Why? Because the $100,000 Roth IRA is all yours. The $100,000 traditional IRA has yet to face a tax bite, which means a portion of it belongs to the IRS. If (and when) tax rates increase, that bite will only get larger.
We have two years left (2024 and 2025) before the impending tax bracket reset. (There is no such thing as a “prior year” conversion, so the ship has sailed on 2023.) If you can afford the tax bill from a non-qualified source, it is highly recommended you consider a Roth conversion. (Yes, paying the taxes due from the IRA is an option, but covering the costs from another account will maximize the conversion.)
Back to the grocery store. Would you bypass the little “On Sale” sign and voluntarily choose to come back when the price of your item had increased? That would be illogical. Likewise, tax bracket history tells us the chances of Roth conversions being offered at a deeper discount are slim. Now is the time to pull out your wallet and make the purchase. Your future wise-shopper self will thank you for it.
https://irahelp.com/slottreport/the-wise-shopper-roth-conversions/
JUST A FEW DAYS LEFT TO FIX 2023 EXCESS 401(K) DEFERRALS
By Ian Berger, JD
IRA Analyst
Follow Us on X: @theslottreport
If you exceeded the 2023 limit for 401(k) deferrals, time is of the essence to correct the error. If you don’t act quickly, the tax consequences can be serious.
The maximum amount of pre-tax and Roth contributions you could make for 2023 was $22,500 (plus $7,500 more if you were least age 50). In applying that limit, contributions you make to ALL plans are combined. (There’s an exception if you participate in both a 401(k) plan and 457(b) plan.)
Most plans have internal controls to prevent you from exceeding the deferral limit in that plan. If the plan mistakenly allows you to overcontribute, it’s up to the plan to fix the problem.
But it’s a different matter if you were in two different plans during the year (because you had two jobs at the same time or changed jobs). One plan had no way of knowing how much you contributed to the other plan. So, the burden is on you to keep track. Your W-2 from each employer indicates the amount of pre-tax and Roth contributions in Box 12. Or, you can check your plan account statements.
If you’ve overcontributed, contact the administrator of one of the plans immediately and make them aware of the problem. To avoid double taxation (see below), the error must be fixed by April 15, 2024.
The plan fixes the problem by making a “corrective distribution” to you. That is the excess amount, adjusted for earnings or losses on the excess. You’ll receive a corrected W-2 that adds back the excess deferrals to your 2023 taxable income. (If you’ve already filed your 2023 tax return, you’ll need to amend it.) Earnings on the excess are taxable to you in 2024.
Example: Kali, age 45, made $15,000 of 2023 pre-tax contributions to Alpha Inc.’s 401(k) plan before leaving Alpha mid-year to work for Beta Inc. Kali didn’t keep track of her total 2023 contributions and made $12,500 of Roth contributions to Beta’s 401(k) – for a total 2023 contribution of $27,500. She exceeded the 2023 deferral limit by $5,000 ($27,500 – $22,500). The excess deferrals earned $800. Kali becomes aware of this problem and contacts the Beta 401(k) administrator. On March 31, 2024, the Beta plan makes a corrective distribution of $5,800 ($5,000 + $800) to her. Beta also sends Kali a corrected 2023 W-2 showing an additional $5,000 of 2023 taxable income. She must include the $800 of earnings as taxable income for 2024.
What if the corrective distribution isn’t paid to you by April 15? You’ll face double trouble. In that case, the excess deferrals won’t be paid to you, but you’ll still have to pay taxes on them as 2023 income. And the excess, along with related earnings, will be taxable to you a second time for the year they are eventually distributed to you.
https://irahelp.com/slottreport/just-a-few-days-left-to-fix-2023-excess-401k-deferrals/
THE 10-YEAR RULE AND INHERITED IRAS: TODAY’S SLOTT REPORT MAILBAG
By Sarah Brenner, JD
Director of Retirement Education
Follow Us on X: @theslottreport
Question:
I have a general question regarding the 10-year time frame for emptying an inherited IRA. Your guidance says that the deadline is the END of the tenth year following death. In this specific situation, the death occurred July 9, 2020, so I believe the deadline is December 31, 2030, the end of the tenth year. I have seen some articles indicating that it is exactly 10 years later (July 9, 2030 in this case), rather than the end of the tenth year.
Would you please clarify this question for me?
Thanks so much for all of your guidance.
Dan
Answer:
Hi Dan,
This was a question that came up often after the SECURE Act established the new 10-year rule for most non-spouse IRA beneficiaries. Guidance from the IRS has now clarified that the 10-year period does end on December 31 of the tenth year following the year of death. So, for the beneficiary of the individual who died on July 9, 2020, the 10-year payout period would end on December 31, 2030.
Question:
I inherited both and a traditional IRA and a Roth IRA from my sister who was one year younger than I am. She was age 80 when she passed in 2021, and had already started taking required minimum distributions (RMDs) on the traditional IRA. I think I am an eligible designated beneficiary because I am not more than 10 years younger than my sister. My question is whether I am required to take a RMD from either or both of these accounts.
Answer:
For the traditional IRA, because you are an eligible designated beneficiary, you are required to take annual RMDs based on the IRS Single Life Expectancy Table. Because your sister was younger than you, you can use her life expectancy instead of your own.
Roth IRAs work a little differently. With the inherited Roth IRA, you have a choice between taking annual RMDs based on your life expectancy or using the 10-year rule. If you elect the 10-year rule, annual RMDs are not required from the Roth IRA during the 10-year period.
https://irahelp.com/slottreport/the-10-year-rule-and-inherited-iras-todays-slott-report-mailbag/
4 WAYS TO REDUCE YOUR RMD TAX BITE
By Sarah Brenner, JD
Director of Retirement Education
Follow Us on X: @theslottreport
Markets continue to climb. That is good news for your retirement account. However, there is a downside. When you contribute to a traditional IRA or a pre-tax 401(k), you make a deal with Uncle Sam. You can get a tax deduction and tax deferral on any earnings in your account. However, eventually the government is going to want its share and will require funds to come out of these accounts. That is when you must start required minimum distributions (RMDs). You may not need the money, and you may not want the tax hit. Bigger retirement account balances can mean larger tax bills. Here are some strategies that can help reduce your RMD tax bite.
1: Do a Qualified Charitable Distribution (QCD)
If you are planning on giving money to charity anyway, why not do a Qualified Charitable Distribution (QCD) from your IRA? For 2024, if you are age 70 ½, you may transfer up to $105,000 annually from your IRA to a charity tax-free. The QCD can also satisfy your RMD (if the QCD is made before the RMD is taken), but without the tax hit. QCDs are not available from employer plans.
2: Use the Still-Working Exception
Are you still working after age 73? If you do not own more than 5% of the company where you work and the company plan offers a “still working exception,” you may be able to delay taking RMDs from your company plan until April 1 following the year you retire. The still-working exception is not available for IRAs but if your plan allows, you can roll your pre-tax IRA funds to your plan and delay RMDs on these funds too. Just be careful. If you have an RMD for that year from your IRA, you must take it before you can roll over the rest of the funds.
3: Consider a Qualified Longevity Annuity Contract
A Qualifying Longevity Annuity Contract (QLAC) is a product designed to help with longevity concerns. Any funds you invest in the QLAC are not included in your balance when it comes to calculating your RMDs until you reach age 85. This will reduce your RMDs. SECURE 2.0 has changed the rules for QLACs by increasing the dollar limit and doing away with restrictions on the percentage of the account limits. The maximum QLAC limit is now $200,000 per person.
4: Convert to a Roth IRA
If reducing the taxation of RMDs is a top concern for you, you may want to consider a Roth IRA conversion or an in-plan 401(k) conversion. This is because you are not required to take RMDs from your Roth IRA or Roth 401(k) during your lifetime. Keep in mind you will need to take your 2024 RMD from your traditional IRA prior to converting to a Roth IRA. Also, both Roth IRA conversions and in-plan 401(k) conversions are taxable events. There is a big payoff though. You will never have to worry about the tax bite of an RMD ever again.
https://irahelp.com/slottreport/4-ways-to-reduce-your-rmd-tax-bite/
10 POINTS: FIXING EXCESS IRA CONTRIBUTIONS
By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on X: @theslottreport
‘Tis the season for identifying and correcting excess IRA contributions. It seems as if every other recent inquiry is about this subject. To keep readers on the straight and narrow, here are ten details about excess IRA contributions and the correction process…
1. Excess contributions occur for many reasons, including exceeding the annual IRA contribution limit, making a contribution without eligible compensation, exceeding the Roth IRA phase-out limits, rolling over ineligible dollars (like a required minimum distribution), rolling over dollars after the 60-day period has expired, etc.
2. The deadline to correct an excess contribution without penalty is generally October 15 of the year after the year of the excess. (October 15, 2024 for a 2023 excess.)
3. Corrections initiated on or before the October 15 deadline avoid the 6% excess contribution penalty and can be made via two ways: withdrawing the excess, plus earnings (called the “net income attributable,” or “NIA”); or recharacterizing the excess plus any gains or losses (i.e., from a Roth IRA to a traditional IRA, or vice versa).
4. NIA is taxable in the year IN WHICH the contribution was made. So, the earnings on an excess contribution made in 2023, even if fixed in 2024, are reportable on the 2023 return.
5. IRS Publication 590-A includes a worksheet to calculate NIA. Earnings are based on overall IRA account performance, not just on the investment where the excess dollars sit.
6. Since corrections made by October 15 of the year after the year of the excess will NOT have a 6% penalty, it is NOT necessary to file IRS Form 5329. Also, there is no penalty on the NIA – only taxes due. (SECURE 2.0 eliminated the 10% penalty on NIA for those under age 59 ½.)
7. After the October 15 deadline, excess contributions can be corrected by withdrawing the contribution or by carrying it forward to use in a future year. Recharacterization is no longer available after the deadline. The 6% penalty applies for each year the excess remains as of December 31. The penalty is paid via Form 5329.
8. After the deadline, the NIA can remain in the account. (Odd, but true.) When a correction is made after October 15, only the excess amount needs to be withdrawn.
9. In situations where an excess contribution remained for many years, the 6% penalty applies for EACH year, and a separate Form 5329 is necessary for each year.
10. SECURE 2.0 created a 6-year statute of limitation for correcting excess IRA contributions. However, in a recent case, the U.S. Tax Court ruled that the statute of limitations is NOT retroactive. This means that IRA owners cannot avoid correcting excess contributions made for years before 2022 — they must be addressed. Bonus info: In the court case mentioned above, the excess contribution was over $25 million, and the applicable penalty was nearly $8.5 million! (We suggest you avoid such situations.)
https://irahelp.com/slottreport/10-points-fixing-excess-ira-contributions/
RMD RULES FOR IRA BENEFICIARIES: TODAY’S SLOTT REPORT MAILBAG
By Ian Berger, JD
IRA Analyst
Follow Us on X: @theslottreport
Question:
Hi,
My last remaining parent, my mother, passed away in May 2017, and my younger brother and I inherited her IRA (equally split into inherited IRA accounts). We were of the understanding we could handle required minimum distributions (RMDs) via the “stretch IRA” method (RMDs spread out over our expected lifetime). The new laws that went into place in 2020 and 2022 have us wondering if we must change what we are doing. Can you please help us with this question?
Regards,
Eric
Answer:
Hi Eric,
The changes made by the SECURE Act apply only to the beneficiaries of IRA owners who died after 2019. Since your mother died in 2017, you and your brother can continue stretching required minimum distributions (RMDs) under the rules in effect before the SECURE Act.
Question:
Dear Mr. Slott,
I am trying to ascertain whether annual RMDs are required for inherited IRAs. In my case, I am sole beneficiary and not disabled. My mother passed away in March 2020 and had begun RMD withdrawals across all her IRAs. I am age 67.
Thank you,
Tim
Answer:
Hi Tim,
You are considered a “non-eligible designated beneficiary.” Therefore, you must empty your mother’s account by 12/31/30 – the end of the 10th following the year of her death. In 2022, the IRS said that non-eligible designated beneficiaries of IRA owners who died after RMDs started also must receive annual RMDs during years 1-9 of the 10-year period. However, since then the IRS has waived the annual RMD requirement for 2021, 2022 and 2023. So, you aren’t required to take RMDs for those years. Keep checking the Slott Report to see whether 2024 annual RMDs are also waived.
https://irahelp.com/slottreport/rmd-rules-for-ira-beneficiaries-todays-slott-report-mailbag/
ARE 529-TO-ROTH IRA ROLLOVERS SUBJECT TO STATE TAX?
By Ian Berger, JD
IRA Analyst
Follow Us on X: @theslottreport
Previous Slott Report articles have covered the new SECURE 2.0 provision allowing 529 funds to be rolled over to Roth IRAs. We’ve reported that there are several unanswered questions concerning this new rollover opportunity. And we’ve discussed the ability to do two rollovers in 2024 – one for 2023 if completed by April 15 and a second by December 31.
Under SECURE 2.0, a Roth IRA contribution of 529 funds must comply with certain requirements. For example, the maximum lifetime amount that can be rolled over is $35,000; the 529 plan must have been open for at least 15 years; the rollover amount cannot exceed the annual Roth IRA contribution limit; and the rollover must be aggregated with “regular” IRA or Roth IRA contributions made for that year. If these rules are met, the rollover is tax-free for federal tax purposes.
However, that’s not necessarily the case for state tax purposes. States are all over the map in their treatment of 529-to-Roth IRA rollovers. Of course, this is not an issue for the 9 states that have no state income tax to begin with: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. (Note that New Hampshire taxes interest and dividends, and Washington state taxes some long-term capital gains.)
The following information comes from a very useful website run by Paul Curley, CFA: Status Board: State Income Tax Treatment on 529 Distributions to Roth IRAs (529conference.com) and is current as of March 13, 2024:
There are 21 states that have said that they will follow federal law: Alabama, Arizona, Delaware, Georgia, Hawaii, Idaho, Kansas, Kentucky, Maine, Maryland, Nebraska, New Mexico, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, South Carolina, Virginia, West Virginia and Wisconsin.
Many states allow residents to take a state tax deduction or credit for 529 contributions made to that state (or, in some cases, to any state’s) 529 plan. Of those states, 10 have indicated that 529 savers may be subject to state income tax “recapture” if 529 funds are transferred to Roth IRAs. This means residents of these states who took a state tax deduction or credit would have to pay it back if they do a 529 rollover. These states are: Illinois, Indiana, Iowa, Massachusetts, Michigan, Minnesota, Montana, New York, Utah and Vermont.
California stands alone. Its residents who do a 529-to-IRA rollover will be subject to state income tax and an additional 2.5% California tax on earnings. (California does not allow a state tax deduction for 529 contributions.)
Finally, in 9 other states, plus the District of Columbia, either the state tax issue is not clear or a decision is pending: Arkansas, Colorado, Connecticut, Louisiana, Mississippi, Missouri, New Jersey, Oklahoma and Rhode Island.
Keep checking Paul Curley’s website for updates.
https://irahelp.com/slottreport/are-529-to-roth-ira-rollovers-subject-to-state-tax/
TWO CAUTIONS WHEN DOING A BACKDOOR ROTH CONVERSION
By Sarah Brenner, JD
Director of Retirement Education
Follow Us on X: @theslottreport
You might be thinking about contributing to a Roth IRA. One big hurdle to making these contributions is the fact that there are income limits that make high income individuals ineligible. For 2024, the phase out range for eligibility for Roth IRA contribution is between $230,000 – $240,000 for those who are married filing jointly and between $146,000 – $161,000 for single filers.
If you are a high earner, you may be able to get around the pesky income limits by using the backdoor Roth IRA conversion strategy. To do this, you make a nondeductible traditional IRA contribution and then convert those funds to a Roth IRA. This strategy works because there are no income limits for traditional IRA contributions or Roth IRA conversions like there are for contributions made directly to a Roth IRA.
When doing a backdoor Roth IRA conversion, here are two important cautions to keep in mind:
1. You or your spouse must have earned income – such as wages or self-employment income. The backdoor Roth IRA conversion strategy starts with a nondeductible traditional IRA contribution. This contribution is subject to all the normal IRA contribution rules. One of these rules is that earned income is required. However, a non-earning spouse can use a working spouse’s earned income to make her own IRA contribution.
Example 1: Jose is age 75, still working and married. His wife is age 73 and retired. Jose will earn $25,000 in 2024. Assume their joint income exceeds the Roth IRA contribution limits. Jose can contribute $8,000 (including the $1,000 catch-up amount) to his nondeductible IRA, and his wife can contribute $8,000 to her nondeductible IRA even though she has no earnings. She can qualify using John’s earnings as long as they are married and file a joint tax return. Once they each contribute to their nondeductible traditional IRAs, they can each convert those IRAs to Roth IRAs shifting a combined $16,000 to their respective Roth IRAs.
2. Your backdoor Roth IRA conversion may be subject to the pro-rata rule. A backdoor Roth IRA conversion is considered a distribution from the traditional IRA and a conversion deposit to the Roth IRA. Whenever you take a distribution from one of your traditional IRAs, all of your owned traditional IRAs, including SEP and SIMPLE IRAs, are included in a pro-rata calculation that determines how much of your distribution is tax-free. When any of your IRAs contains both nondeductible and deductible funds, then each dollar withdrawn from any IRA will contain a combination of tax-free and taxable funds based on the percentage of after-tax funds to the entire balance in all your IRAs.
Example: Grace, age 37, is single, and her income is too high for her to contribute directly to a Roth IRA for 2024. She decides to use the backdoor Roth IRA conversion strategy. She makes a non-deductible contribution of $7,000 to a traditional IRA and then converts the funds to a Roth IRA. Grace also has a SIMPLE IRA from a previous employer. Grace’s backdoor Roth IRA conversion will be partially taxable because the pro-rata rule will apply.
https://irahelp.com/slottreport/two-cautions-when-doing-a-backdoor-roth-conversion/
REQUIRED MINIMUM DISTRIBUTIONS AND ELIGIBLE DESIGNATED BENEFICIARIES: TODAY’S SLOTT REPORT MAILBAG
By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on X: @theslottreport
QUESTION:
I know you can delay taking your first required minimum distribution (RMD) until April 1 of the year after you turn age 73. If you convert your entire IRA into a Roth before that date, but after you turn age 73, do you still have to take your first RMD distribution? Or is no distribution required as the entire IRA is converted prior to April 1 of the following year?
Best regards,
Tom
ANSWER:
Tom,
Once you hit January 1 of the year you turn age 73, there is no avoiding the RMD. Converting the entire IRA prior to turning age 73 that same year, or even before April 1 of the year after you turn age 73, does not help. The RMD will need to be taken prior to any conversion. If the RMD is erroneously converted, it will be an excess contribution in the Roth and will need to be removed.
QUESTION:
I have a question about an inherited traditional IRA. The definition of an “eligible designated beneficiary” (EDB) includes any individual who is “not more than 10 years younger than the IRA owner.” What about a person who is older than the original owner? Is such a person an EDB?
ANSWER:
You are correct that one of the ways to qualify as an EDB is to be not more than 10 years younger than the IRA owner. This also includes anyone who is older than the IRA owner. Consider it this way: Subtract 10 years from your age. Anyone in the world who is that age or older qualifies as an EDB on your IRA.
https://irahelp.com/slottreport/required-minimum-distributions-and-eligible-designated-beneficiaries-todays-slott-report-mailbag/
WHAT IS RETIREMENT? FANTASY VS. REALITY
By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on X: @theslottreport
Three times a week, every week, we add to the Slott Report. Two article entries and a mailbag. All factual, measurable information. “This is what to consider when you name a trust as your beneficiary.” “How much can a sole proprietor contribute to a SEP account?” “This is how you fix an excess IRA contribution.” On and on it goes. All excellent, helpful material.
But what is the end game? Why do we wade through the morass of IRS rules and complicated legislation and oftentimes fantastically dry data? It is an overall effort to help people reach and create a “successful retirement.” But what does that mean? What is retirement? Fantasyland says a person works a job for 40+ years and saves a little annually through IRA contributions and 401(k) salary deferrals. And when this person stops working at age 65, he can ride off into the sunset and do all the things he wanted to do previously, but could not because he was tied to a desk or a mop or a piece of heavy construction equipment.
A few people may still fall into this category — workers who maintain steady employment at a single company followed by blissful retirement. But that ain’t the case for most of us. Research shows the average person will have 12 jobs during his or her lifetime. Also, in March 2023, the Bureau of Labor Statistics reported that only 56% of civilian workers participate in a retirement plan. All of us are searching for the right professional, personal and financial combination. How can I keep a roof over my head, food on the table, do the things I enjoy today, but also sleep comfortably knowing my future – my “retirement” years – will be waiting for me?
For those who find gratifying employment and mental solace, congratulations are in order! For most, it’s a never-ending search. The Dirty Heads have a song called “Vacation.” The lyrics say: “A-a-ay, I’m on vacation. Every single day ’cause I love my occupation. A-a-ay, I’m on vacation. If you don’t like your life, then you should go and change it.”
I agree. If you don’t like where you’re at, do everything in your power to change it, because fantasyland retirement will not mystically appear at age 65. Create a budget. Meet with a financial advisor. Go back to school. Develop a plan. Maintain a long-term view. Yes, this is boring, real-life stuff. But if you stick to the plan, it will bear fruit. By sticking to the long-term plan, short-term gratification opportunities should present themselves.
Recently I was presented with my own short-term “live for today” opportunity. My son is spending his freshman year studying abroad in Florence, Italy, and my wife and I were able to visit. We wore out a big part of the country — Venice, Rome, Pisa, Florence, Cinque Terre. Daily step counts reached 27,000. At one point, breathing heavily and ascending a long, steep gravel hill in Boboli Gardens, my wife said, “Good thing we came here while we’re young. No way I could climb this if I was retired.”
And thus, this Slott Report entry was born. Fantasyland says every septuagenarian energetically bounces around Europe. Reality tells us otherwise. (Run a Google image search for “elderly couple asleep in gondola.”) While we all must deal with everyday obstacles, it is imperative to put your best foot forward. We only get one shot at life. Face reality and create positive change, because “blissful retirement” as it’s portrayed is not promised — nor will it magically appear.
https://irahelp.com/slottreport/what-is-retirement-fantasy-vs-reality/
HOW SECURE 2.0 IMPACTS COMPANY PLAN IN-SERVICE WITHDRAWALS
By Ian Berger, JD
IRA Analyst
Follow Us on X: @theslottreport
Retirement plan funds are designed for retirement, but Congress continues to make it easier for employees to pull out those funds while still working. The SECURE 2.0 law adds several new in-service withdrawals that can be made from 401(k), 403(b) and 457 plans. The law also relaxes some of the rules for traditional hardship withdrawals from these plans.
New SECURE 2.0 In-Service Withdrawals
The new in-service withdrawal options are for: federally-declared disaster expenses; terminal illness; victims of domestic abuse; and emergency expenses. (In-service withdrawals to pay long-term care premiums become available in 2026.) Note that plans are not required to offer withdrawals for any of these reasons. But if offered, these new SECURE 2.0 withdrawals can be made before age 59 ½ —without paying the 10% early distribution penalty.
SECURE 2.0 Changes to Traditional Hardship Withdrawals
Traditional hardship withdrawals from 401(k) and 403(b) plans have always been required to satisfy three conditions:
- The withdrawal must be for an “immediate and heavy financial need.” Most plans allow employees to automatically satisfy this requirement if their expense fits into one of seven “safe harbor” categories: medical expenses; home purchase costs; post-secondary educational expenses; payments necessary to prevent eviction or mortgage foreclosure; funeral expenses; expenses to repair home damage; and disaster-related expenses and loses.
- The amount of the hardship request can’t more than is necessary to cover the expense.
- The employee can’t have enough cash or other assets readily available to cover the expense.
457(b) plans are subject to a stricter standard than the 401(k)/403(b) standard: the expense must have resulted from an “unforeseeable emergency.”
Starting in 2023, the SECURE 2.0 law permitted 401(k) and 403(b) plans to allow employees to self-certify that all three of these conditions have been met. 457(b) plans can also allow self-certification to demonstrate an unforeseeable emergency. Although self-certification is optional, not mandatory, most plans will welcome it as a way of taking a big administrative burden off their plate.
SECURE 2.0 also gave 403(b) participants more access to their accounts for hardship withdrawals. Before 2024, 401(k) hardship withdrawals could be made from all plan accounts, but 403(b) withdrawals could only come from employee salary deferrals (without earnings). In addition, 403(b) participants were required to obtain plan loans before receiving a hardship distribution, but 401(k) participants were not. Effective for 2024, SECURE 2.0 makes the 403(b) hardship withdrawal rules the same as the 401(k) rules.
Taxes and Penalties
Keep in mind that in-service withdrawals of pre-tax funds, whether traditional hardship withdrawals or SECURE 2.0 withdrawals, are taxable. And, while SECURE 2.0 withdrawals are never subject to the 10% penalty, traditional hardship withdrawals may be subject to penalty if made before age 59 ½.
https://irahelp.com/slottreport/how-secure-2-0-impacts-company-plan-in-service-withdrawals/
HIGHER EDUCATION AND BACKDOOR ROTH CONVERSIONS: TODAY’S SLOTT REPORT MAILBAG
By Sarah Brenner, JD
Director of Retirement Education
Follow Us on X: @theslottreport
Question:
I have a client who is under age 59 ½ with a small traditional IRA. She wants to cash it in and use the funds for college education for her daughter. If I remember correctly, they can use this without a 10% penalty. Is there a limit on the amount she can take penalty-free to use for college?
Answer:
There is no limit to the amount of funds that can be taken penalty-free to pay for higher education costs. The funds can be used for tuition, room and board and other expenses that are required by the school. Keep in mind that although the 10% penalty would not apply to any pretax funds coming out of the IRA, these distributions would still be taxable.
Question:
I am interested in doing the backdoor Roth strategy. I do not have an IRA, but I do have an old SIMPLE IRA from a previous employer. Does the pro-rata rule apply here?
Thanks,
Marcel
Answer:
Hi Marcel,
Whenever the backdoor Roth IRA conversion strategy is being considered, it is good to think about the possible impact of the pro-rata formula. This formula requires you to consider all of your other traditional IRAs when determining the taxation of the conversion.
For this purpose, SIMPLE IRAs are also included (as are SEP IRAs), so when you apply this formula you must also include your old SIMPLE IRA along with any traditional IRAs you might have. This means that, even if you use the backdoor Roth IRA conversion strategy by making a nondeductible traditional IRA contribution and then converting it — a portion of the conversion will still be taxable. That does not mean that doing a backdoor Roth IRA conversion is a bad strategy, but it does mean that you should expect a tax bill.
https://irahelp.com/slottreport/higher-education-and-backdoor-roth-conversions-todays-slott-report-mailbag/
TAX TIME TIPS FOR IRAS
By Sarah Brenner, JD
Director of Retirement Education
Follow Us on X: @theslottreport
IRAs are an important, but often overlooked, part of your overall tax planning. As the deadline for filing 2023 tax returns approaches, it is a good time to incorporate your IRA plan strategies with your overall tax plan. You are probably now busy gathering the necessary information to file your 2023 federal income tax returns. You will want to be sure that as you do so, you keep some important IRA rules and strategies in mind.
2023 IRA Distributions
If you received a distribution from an IRA in 2023, that distribution may affect your overall tax situation. Generally, distributions from retirement plans that include pre-tax dollars will be included in taxable income in the year taken. IRA distributions can increase ordinary income for the year of the distribution, which can potentially cause the loss of valuable exemptions, credits, tax deductions, and taxation of Social Security.
An early distribution may result in a 10% penalty on top of any income tax already owed for the distribution. Remember that rollovers should be reported on your tax return even though distributions taken in 2023 that are properly rolled over are not included in income for the year.
IRA Contribution Deadline for 2023
It is not too late for you to make a 2023 prior-year traditional or Roth IRA contribution. The deadline for IRA contributions is the tax-filing deadline — not including extensions. This year, for most taxpayers, that deadline is April 15, 2024. Having an extension to file your federal income tax return does not give you more time to make a 2023 IRA contribution.
SEP or SIMPLE IRA contributions work differently. These contributions may be made up to the business’ tax filing deadline — including extensions.
If you qualify, making a deductible traditional IRA contribution for 2023 is a valuable strategy to lower 2023 taxable income. Also, making your first Roth IRA contribution now as 2023 prior-year contribution will have the benefit of starting the five-year period for tax-free distributions of earnings as of January 1, 2023, even though the contribution is not actually made until 2024. This strategy gives your client the potential to take qualified tax-free distributions of earnings from their Roth IRA in less than five years.
Unwanted or Excess 2023 IRA Contributions
Now is also the time to address unwanted or excess tax-year IRA contributions. You may have made a traditional IRA contribution believing you would be able to deduct it. Or, you made a Roth IRA contribution and discovered your income was too high. These contributions may be removed as an excess without penalty or recharacterized.
While the deadline for these corrective transactions is not until October 15, 2024, your 2023 federal income tax return may be affected. Therefore, doing these transactions now before filing can help avoid having to file an amended return later. Acting now also avoids the potential pitfalls of waiting until the last possible minute to meet this important deadline.
No Prior-Year Conversions
If you are looking at your 2023 tax situation and thinking that it would be beneficial to do a conversion, there is some bad news. There is no such thing as a prior-year conversion. It is too late. A 2023 conversion had to leave the traditional IRA in 2023 and be reported by the custodian on a 2023 Form 1099-R.
QCDs for 2023
It is also too late to do a 2023 qualified charitable distribution (QCD). You cannot take a distribution in 2024 and have it count as a 2023 QCD.
If you did do a QCD in 2023, be aware that you will not be getting any specific reporting from the custodian showing this. You will only receive a 2023 Form 1099-R showing a distribution, but you will need to properly report the QCD on your 2023 tax return. Be sure that your tax preparer is aware that a QCD was done in 2023 so you can cash in on this valuable tax break.
https://irahelp.com/slottreport/tax-time-tips-for-iras/
WHAT’S THE PROCESS WHEN A TRUST (OR ESTATE) IS IRA BENEFICIARY?
The same conversation has, understandably, been repeated many times. The questions are similar: “What do we do when a trust (or estate) is IRA beneficiary? How do we set up the account? Aren’t we now stuck with the high trust tax rates?” Of course, there is not enough space here to get deep into the weeds, but there are some foundational considerations to cover when it comes to this confusing topic.
Account Ownership. When a trust or estate is named as IRA beneficiary, then the trust or estate is the beneficiary. The beneficiary is NOT the trust beneficiaries or the beneficiaries of the estate. We do not get to automatically disregard the trust or estate and set up an inherited IRA for any of those people (assuming they are people). In fact, we must set up a trust-owned or estate-owned inherited IRA. The trust or estate oversees the account – or more specifically, the trust trustee or the executor of the estate is in charge. For a trust-owned inherited IRA, the titling of the account might be something like: “William Smith, IRA (deceased June 1, 2021) F/B/O Adam Johnson, Trustee of The Smith Family Trust, beneficiary.”
Payout Rules. An estate is a non-designated beneficiary, or what I like to call a “non-person” beneficiary. When a non-person inherits an IRA, there are only two possible payout structures (not counting a lump sum distribution): the 5-year rule or the “ghost” rule. Which payout rule applies depends on when the original IRA owner died in relation to his required beginning date (RBD). The RBD is April 1 of the year after the year a person turns 73 (or whatever RMD age was in effect at the time, e.g., 70 ½ or 72). When death is before the RBD, we get the 5-year rule. There are no required minimum distributions (RMDs) during the 5 years. The account must simply be emptied by the end of the fifth year after the year of death.
When death is on or after the RBD, we use the ghost rule. Annual RMDs apply to the estate-owned inherited IRA based on the deceased IRA owner’s remaining single life expectancy, had he survived. Use the decedent’s age in the year OF death to find the initial factor. Then subtract one from this factor for each successive year.
If a trust is named as IRA beneficiary, and if that trust passes the “look-through” or “see-through” rules, we can avoid the 5-year/ghost payouts. With a see-through trust, we can “look through” the trust to the trust beneficiary and use that person’s status to determine the payout applicable to the trust-owned inherited IRA. For example, if the trust beneficiary would be subject to the 10-year rule, then we use that. If the trust beneficiary qualifies as an eligible designated beneficiary (for example, because she is disabled), then we can apply that person’s age for full lifetime RMD stretch payouts from the trust-owned inherited IRA.
Taxes. It is often assumed that with a trust or estate as IRA beneficiary, high tax rates will automatically apply. For comparison purposes, trusts hit the 37% bracket in 2024 when ordinary income exceeds $15,200. A married couple, filing joint, doesn’t hit the 37% bracket until income exceeds $731,200. But the high trust tax rates only apply when payouts from the trust-owned inherited IRA remain in the trust account. Such is not always the case. Oftentimes, dollars paid out of a trust-owned (or estate-owned) inherited IRA will flow through the trust or estate and be distributed to the trust or estate beneficiary. This allows the taxes due to be shifted to these beneficiaries at whatever their personal tax bracket may be.
When a trust or estate is the beneficiary of an IRA, there are special rules that must be followed. Things can get complicated quickly. Before haphazardly opening new inherited accounts and bouncing IRA money around, it is important to understand some basic concepts – like ownership structure, applicable payout rules and taxes.
https://irahelp.com/slottreport/whats-the-process-when-a-trust-or-estate-is-ira-beneficiary/
COVERDELL ESA ACCOUNTS AND FIRST RMD YEAR DISTRIBUTIONS: TODAY’S SLOTT REPORT MAILBAG
By Ian Berger, JD
IRA Analyst
Follow Us on X: @theslottreport
Question:
Hi Ed,
I have Coverdell ESA accounts for my 5 grandchildren. My question is whether Coverdell ESAs can be treated the same as 529 plans under the new law when it comes to unused funds being eligible for rollover to a Roth IRA.
Answer:
The SECURE 2.0 provision allowing Roth IRA rollovers of unused 529 funds does not cover Coverdell ESA accounts. However, you can do a 60-day rollover or direct transfer of the Coverdell accounts to 529 plans and then roll over any unused funds to a Roth IRA (assuming you meet the requirements for a 529-to-Roth IRA rollover).
Question:
I need your help! We have a unique situation with a client, Paul, born December 31, 1951. He will be age 73 on December 31, 2024. If Paul takes a distribution from his IRA in October, will that be considered his RMD since he isn’t RMD age until December 31?
Paul’s RMD is almost $50,000 and he would rather not double that up in 2025. So, we want to be sure that any IRA distribution he takes any time during 2024 will qualify as his RMD.
I thought, under the old rules, that an IRA distribution at age 70 did not qualify as an RMD in the year the client turned age 70 ½. For example, if I turned age 70 in February I would be age 70 ½ in August. If I took a distribution from my IRA in May, did that satisfy my age 70 ½ RMD?
Kathy
Answer:
Hi Kathy,
Any distribution taken in the year someone reaches his first RMD year counts as an RMD for that year. So, if Paul takes a distribution in October 2024 (or anytime in 2024), that will count as a 2024 RMD. The same rule applied under the old rules when the first RMD year was the year someone reached age 70 ½. So, in your example, if you turned age 70 ½ in August of a particular year, a distribution taken in May of that year would count as an RMD for that first RMD year.
https://irahelp.com/slottreport/coverdell-esa-accounts-and-first-rmd-year-distributions-todays-slott-report-mailbag/
WHAT ARE THE RULES FOR 401(K) IN-SERVICE WITHDRAWALS?
Congress has determined that 401(k) and other company plan funds, with certain exceptions, should be saved for retirement. For that reason, it has imposed strict restrictions on the ability of employees to withdraw from these plans while still working.
Plans must follow these rules, or they risk losing their tax-qualified status. But plans are free to impose even stricter rules than required by the tax code. So, check your plan written summary or ask your plan administrator or HR rep for the particular withdrawal rules that apply to your plan.
Restrictions on Withdrawals:
Each 401(k) account has its own restriction rules:
Pre-tax and Roth Employee Contributions
Generally, 401(k) plans can’t allow in-service distributions from pre-tax and Roth employee contribution accounts before age 59 ½. But withdrawals from these accounts are available, if the plan allows, in case of financial hardship, disability or birth or adoption, and for active reservists. Plans also may allow SECURE 2.0 withdrawals (discussed below).
After-tax Contributions
Plans that offer non-Roth after-tax contributions can allow those contributions and their earnings to be withdrawn at any time, even before age 59 ½. This would be helpful if employees are able to use the “Mega Backdoor Roth” strategy to convert after-tax contributions to Roth IRAs.
Emergency Savings Contributions
Employers can offer lower-paid workers a special account within a 401(k) plan for emergency savings contributions made on a Roth basis. Withdrawals from these accounts are available at least monthly.
Employer Contributions
Most plans that allow in-service withdrawals from employer contribution (matching or nonelective/across-the-board) accounts follow the same rules that apply to pre-tax and Roth employee contribution accounts. This simplifies plan administration. But plans can be more liberal and allow withdrawals at a specified age (even earlier than 59 ½), after at least five years of plan participation or after the contribution has been in the plan for at least two years.
Rollover Contributions
Some 401(k) plans allow employees to roll over pre-tax retirement accounts, including IRAs, into the plan. Plans can allow in-service withdrawals from rollover contribution accounts at any time, regardless of age or service. But this is not mandatory and here again, many plans apply the same rules that apply to pre-tax and Roth employee contribution accounts.
SECURE 2.0 Withdrawals
The SECURE 2.0 law adds several new in-service withdrawals that can be made from any 401(k) account. These are withdrawals for: federally-declared disaster expenses, terminal illness, victims of domestic abuse, and emergency expenses. (In-service withdrawals to pay for long-term care premiums become available in 2026.) These withdrawals can be taken at any age, but withdrawals for terminal illness are only available if the employee is otherwise eligible for a withdrawal (for example, because of financial hardship). Note that plans are not required to offer any of these SECURE 2.0 withdrawals.
Taxation
In-service withdrawals of pre-tax 401(k) funds are taxable and, if made before 59 ½, may be subject to penalty. A Roth 401(k) withdrawal that is a “qualified distribution” comes out completely tax-free. If not qualified, the earnings part of a Roth withdrawal is taxable under a pro-rata rule. The earnings portion of each withdrawal of non-Roth after-tax contributions is always taxable on a pro-rata basis.
https://irahelp.com/slottreport/what-are-the-rules-for-401k-in-service-withdrawals/
TAX COURT RULES NEW SECURE 2.0 STATUTE OF LIMITATIONS ON EXCESS CONTRIBUTION PENALTY IS NOT RETROACTIVE
By Sarah Brenner, JD
Director of Retirement Education
Follow Us on X: @theslottreport
The Tax Court recently ruled that the new SECURE 2.0 statute of limitations (SOL) on the 6% excess IRA contribution penalty is not retroactive.
SECURE 2.0 Changes
SECURE 2.0 established a six-year SOL on the 6% excess IRA contribution penalty and a three-year SOL on penalties for missed required minimum distributions (RMDs).
Prior to SECURE 2.0, the SOL for both these penalties was not considered to start to run until Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, was filed. If Form 5329 was not filed, the IRS could have potentially assessed penalties at any time, even years into the future, and gone all the way back to the first year when any excess contribution or missed RMD was made.
In SECURE 2.0, Congress said the new SOL for both penalties was “effective upon enactment.” The “enactment” date of SECURE 2.0 was December 29, 2022. But the new law was not clear on whether the new SOL applied only for years on or after 2022 or also applied retroactively for years prior to 2022. The IRS has not issued any guidance on this.
New SOL Is NOT Retroactive
In Couturier v. Commissioner, No. 19714-16; 162 T.C. No. 4, (February 28, 2024) the Tax Court ruled that the SOL for the excess contribution penalty should NOT be applied retroactively. The case arose from a last-ditch appeal by Clair Couturier who had previously been found to have owed $8.4 million in excess contribution penalties after he attempted to roll over $26 million in plan funds he received in a buyout package.
This case did not involve the new three-year SOL for the missed RMD penalty. However, the effective date for that provision is the same as the effective date for the new SOL for the excess contribution penalty. So, it seems reasonable to assume the Tax Court would interpret the missed RMD penalty to work the same way – that is, it also is not retroactive.
Stay Tuned
This case has already been appealed multiple times, so it is possible that this is not the final word here. In the meantime, anyone thinking that they can let sleeping dogs lie, and not fix excess IRA contributions or missed RMDs from years prior to 2022, may want to reconsider. This Tax Court case is a warning that the new SECURE 2.0 SOL may not be enough to make those problems go away. Stay tuned to the Slott Report for any future updates!
https://irahelp.com/slottreport/path-slottreport-tax-court-rules-new-secure-20-statute-limitations-excess-contribution-penalty-not/
ROTH CONVERSIONS AND QUALIFIED CHARITABLE DISTRIBUTIONS: TODAY’S SLOTT REPORT MAILBAG
By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on X: @theslottreport
QUESTION:
How many times in one year can a person do a Roth conversion?
Thank you.
ANSWER:
A person can do an unlimited number of Roth conversions in a year. Roth conversions do not count against the one-rollover-per-year rule, so there is no concern there. Each conversion in a calendar year will have the same start date for the 5-year conversion clock –- January 1 of that year. So essentially, multiple conversions in a single year will be combined and considered one big conversion for 5-year-conversion-clock reporting.
QUESTION:
Can a QCD (qualified charitable distribution) be made from a 401(k) or defined benefit plan?
Thanks.
ANSWER:
QCDs can only be made from IRAs (and inactive SEP and SIMPLE IRAs). A QCD cannot be done from any employer plans. However, employer plan dollars –- like from a 401(k) –- could potentially be rolled over to an IRA, and then the QCD could be completed. A few more important QCD items to consider: the IRA owner must be at least age 70½ to do a QCD; the QCD cap for 2024 is $105,000; the donation must be directly transferred from the IRA to the charity (although a check made payable to the charity can be sent to the IRA owner for hand delivery to the charity); and nothing can be received in return for the donation.
https://irahelp.com/slottreport/path-slottreport-roth-conversions-and-qualified-charitable-distributions-todays-slott-report-mailbag-0/
5 COMMON IRA MISTAKES AND PROPER CORRECTIVE ACTION…IF AVAILABLE!
By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on X: @theslottreport
Year after year, many of the same IRA errors happen again and again. Based on the volume of times these mistakes occur, it seems appropriate to create a short list of repeat offenders…and offer some advice on how to properly move forward. In no particular order, here is a handful of common IRA mistakes, along with the proper corrective measures.
1. Rolled over a required minimum distribution (RMD). Oops. RMDs cannot be rolled over. Technically, an RMD is not an ERD – an “eligible rollover distribution.” If an RMD is rolled over, it is an excess contribution, and the excess contribution rules must be followed. You have until October 15 of the year after the year of the excess contribution to make the correction with no penalty. Prior to the deadline, the rolled-over RMD must be withdrawn along with the attributable earnings. No special tax forms are required, and there is no penalty. Any earnings are taxable. After the October 15 deadline, only the excess must be withdrawn – the earnings can remain. (I know – weird.) File IRS Form 5329 and pay the 6% annual excess contribution penalty.
2. Contributed to a Roth IRA for a child with no earned income. Your child must have earned income to be eligible for a traditional or Roth IRA contribution. If a contribution is made to an IRA for anyone with no earned income, it is an excess contribution, and the same excess contribution correction protocols outlined above must be followed.
3. Took two IRA distributions with the intent to roll them both over. Uh-oh. The one-rollover-per-year rule does not allow two separate IRA distributions to be rolled over within a 12-month period. Combining them into a single deposit won’t work. Is there a fix? If you are still within the 60-day period, one of the distributions can be rolled over. Usually, a person will choose to put back the larger of the two withdrawals. Since the other distribution cannot be rolled over, and since you will be stuck with the taxes anyway…might as well put it into a Roth IRA (assuming you are still within the 60 days). This qualifies as a valid Roth conversion, and conversions do not count against the one-rollover-per-year rule.
4. Non-spouse beneficiary tried to do a 60-day rollover with inherited IRA dollars. Oh, no. There is no fix for this scenario. This is what we refer to as a “fatal error.” Non-spouse IRA beneficiaries cannot do 60-day rollovers with inherited IRA dollars. If you take a distribution from an inherited IRA as a non-spouse beneficiary, taxes will be due. Those dollars cannot be rolled over, converted, or redeposited back into the same inherited IRA.
5. Taxes withheld on Roth conversion when under 59 ½. This is a sneaky mistake. Taxes withheld on a Roth conversion do not get converted. If you are under 59 ½, this is a problem. The taxes withheld are, in fact, a premature withdrawal, and a 10% penalty will be due on the money sent to the IRS! However, if caught in time, there is a fix. If still within 60 days, the amount withheld can be replaced with money from another account. Use other dollars to “make up” the withholding. Put these “make-up” dollars into the Roth, and the conversion will be made whole. Now, the taxes originally withheld will be a credit at the IRS.
Potholes and speedbumps abound with IRAs. Drive carefully. But know that if you do bump a curb, there is a good chance proper corrective action is available.
https://irahelp.com/slottreport/path-slottreport-5-common-ira-mistakes-and-proper-corrective-actionif-available/
A WAY TO JUMP-START 529-TO-ROTH ROLLOVERS
By Ian Berger, JD
IRA Analyst
Follow Us on X: @theslottreport
We have covered in The Slott Report the new SECURE 2.0 provision that allows unused 529 plan funds to be rolled over to Roth IRAs. It originally appeared that this new rule was to be effective for 2024. However, the IRS has now said that rollovers done before April 15, 2024 can count as Roth IRA contributions for tax year 2023 if the 529 beneficiary has not already maxed out on his 2023 IRA contribution limit.
As background, the new SECURE 2.0 provision contains a number of restrictions. The total rollover amount cannot exceed a lifetime maximum of $35,000, and that limit is not indexed for inflation. The Roth IRA must be in the name of the 529 beneficiary – not the 529 owner. The 529 plan must have been open for more than 15 years, and rollover amounts cannot include any 529 contributions (and earnings) made in the preceding five-year period.
529-to-Roth IRA rollovers are considered Roth IRA contributions, so they count towards the annual IRA contribution limit. This means that a full $35,000 529-to-Roth IRA rollover would take several years to complete. Any other IRA contributions (traditional or Roth) made for the same year would reduce the amount of the 529-to-Roth IRA rollover available.
But can a beneficiary who has not already maxed out on the 2023 IRA contribution limit for 2023 do a 529-to-Roth IRA rollover by April 15, 2024? In other words, can a 529-to-Roth rollover done before April 15, 2024 count as a 2023 contribution?
SECURE 2.0 is not clear on this, but the law does say that the new rule is effective for 529 distributions made after December 31, 2023. It does not say that it is effective for tax years beginning after December 31, 2023. Based on this language, the IRS added the following to its 2023 1099-R instructions:
“A [529] distribution made after December 31, 2023, and before April 15, 2024, that is rolled over to a Roth IRA by April 15, 2024, and designated for 2023 would be reported as a Roth IRA contribution for 2023.”
So, a 529 distribution made in 2024 and rolled over before April 15, 2024 can count as a tax year 2023 IRA contribution. This means that if you are a 529 beneficiary and you haven’t already made IRA contributions for 2023 up to the $6,500 limit, you still have time to do a 529-to-Roth rollover in an amount equal to the unused part of the $6,500 limit. Just make sure the custodian knows to report this as a 2023 contribution. Better yet, if you do a rollover before April 15 that counts as a 2023 contribution, you can also do a second rollover in 2024 that counts as a 2024 IRA contribution.
https://www.irahelp.com/slottreport/way-jump-start-529-roth-rollovers
BACK-DOOR ROTH IRAS AND ROTH 401KS: TODAY’S SLOTT REPORT MAILBAG
By Sarah Brenner, JD
Director of Retirement Education
Follow Us on X: @theslottreport
Question:
Hi
Can we contribute backdoor Roth IRA money to my husband’s Roth IRA since I have existing traditional IRA accounts, but my husband has none? Thank you very much for answering my questions.
Pinan
Answer:
Hi Pinan,
Many high-income individuals use back-door Roth IRA conversions to fund Roth IRAs when their income is too high to contribute directly to a Roth IRA. There are no income limits on conversions, so what these individuals do is make nondeductible traditional IRA contributions and then convert these funds to a Roth IRA.
To use the back door Roth IRA conversion strategy, you must have earned income, and you are limited to the IRA contribution limit for the year. For 2024, the contribution limit for IRAs is $7,000 ($8,000 if you are age 50 or over).
When the funds are converted, a pro rata formula applies. So, if you have other taxable traditional IRA funds, then a portion of your conversion will be taxable even though the contribution was nondeductible. If your husband has no other IRA funds (including SEP and SIMPLE plans), then the pro rata formula would not apply when he does a back door Roth conversion. However, it would apply to you if you were to do a backdoor Roth. Each individual is looked at separately when applying this formula. One spouse’s pre-tax vs. non-deductible (after-tax) IRA dollars has no impact on the other spouse.
Question:
What if I put a small Roth distribution from a former employer plan into a traditional IRA at a bank that I had opened with a rollover from a previous employer. Is there a problem with that? If so, what should I do about it? It has only been a few months.
Sincerely
Candy
Answer:
Hi Candy,
This is a problem because Roth 401(k) funds are not eligible to be rolled over to a Traditional IRA. You have an excess contribution in your Traditional IRA. If you do not fix this, you will be subject to a 6% penalty on the ineligible dollars.
You can fix the excess and avoid the penalty by removing it, plus net income attributable, by October 15 of the year following the year of the contribution (or in your case, the erroneous rollover). Your other potential fix with the same deadline would be recharacterizing these funds to a Roth IRA. You will need to be sure that the custodian properly reports the transaction either as a correction of an excess contribution or recharacterization because special coding is required.
https://www.irahelp.com/slottreport/back-door-roth-iras-and-roth-401ks-todays-slott-report-mailbag
MAKING A 2023 IRA CONTRIBUTION? HERE ARE 4 RULES THAT MAY SURPRISE YOU
By Sarah Brenner, JD
Director of Retirement Education
Follow Us on X: @theslottreport
The tax season is upon us. This is the time when many individuals fund their IRAs by contributing for the prior year. Contributing to an IRA may seem pretty straightforward, and in many ways it is! But there can be twists. Here are four rules that may surprise you when you make your 2023 IRA contribution.
1. File first and fund later. Frequently, during tax season we are asked if an IRA contribution must be made before the tax return is filed. The answer is no. This is not required. You can claim a deduction for your 2023 IRA contribution now when you file your taxes and fund it later. Some people even fund their IRA contribution with their tax refund if the timing is right. Just don’t wait too long. If you claim the contribution, be sure you get it done before the deadline (see #4 below).
2. Spousal contributions can help. Not working outside the home doesn’t necessarily count you out when it comes to saving for retirement by making a 2023 IRA contribution. If your spouse has taxable compensation for the year, you can make a spousal contribution to your IRA based on your spouse’s taxable compensation. Yes, you can still build your retirement savings as a stay-at-home spouse.
3. No age limits for IRA contributions. Think you are too old to contribute to an IRA? It’s time to reconsider. The rules have changed. It used to be that contributions were not permitted to a traditional IRA once you reached the year you turned age 70 ½, but the SECURE Act did away with this restriction. There have never been age limits for Roth IRA contributions. The bottom line is that you can be any age and make a 2023 contribution to either a traditional IRA or Roth IRA. This could be helpful for those who work part time in retirement and do not need the income.
4. No extensions for IRA contributions. You may be able to get more time to file your taxes but that will not help you with your IRA contribution. The deadline for making your 2023 traditional or Roth IRA contribution is April 15, 2024. This is true even if you have an extension of time to file your taxes.
https://www.irahelp.com/slottreport/making-2023-ira-contribution-here-are-4-rules-may-surprise-you