IRA BLOG

By Ian Berger, JD
IRA Analyst
Follow Us on X: @theslottreport
The August 28, 2023 Slott Report summarized IRS Notice 2023-62, where the IRS delayed the effective date of the SECURE 2.0 rule requiring catch-up contributions by higher-paid older employees to be made on a Roth basis. The postponement until January 1, 2026 was in response to persistent complaints by recordkeepers and employer plan lobbyists that it would be impossible to have the new rule in place by its original January 1, 2024 effective date. The delay means that until 2026, plans can continue to accept pre-tax catch-up contributions from all employees (including high-paid).

The Roth catch-up mandate raised several questions that the IRS preliminarily addressed in Notice 2023-62:

• The Roth mandate only applies to employees with “wages” from the employer in the preceding year that exceeds a dollar threshold. (That threshold would have been $145,000 in 2023 wages had the rule become effective in 2024.) But self-employed persons have self-employment income, not wages. If a self-employed’ s income exceeds the dollar limit in the prior year, is he required to make catch-ups on a Roth basis?  The IRS said no. Only high-paid workers with actual “wages” are subject to the Roth rule. The IRS also confirmed that “wages” means wages subject to FICA; that is, amounts reported on Box 3 (not Box 1) of W-2.
• What if an employee subject to the Roth catch-up requirement makes an election to make catch-ups on a pre-tax basis? The IRS said plans can automatically disregard that election and treat it as an election to make catch-ups on a Roth basis.
• Sometimes, a 401(k) plan is sponsored by more than one employer. If an employee has wages in the preceding year from more than one sponsoring employer, are her wages aggregated for purposes of the dollar threshold? The IRS said no. For example, assume  Companies A and B both sponsor the same 401(k) plan, and the Roth mandate in 2026 applies to someone with 2025 wages in excess of $150,000. Sandy changed jobs from Company A to Company B in 2025 and had $100,000 of wages from Company A and $125,000 wages from Company B. Sandy, a Company B employee in 2026, isn’t subject to the Roth mandate because only her 2025 Company B wages ($125,000) – not the combined $225,000 – are taken into account.
• What will happen to a plan in 2026 that doesn’t already offer Roth contributions and doesn’t want to add them? (After all, 401(k) Roth contributions are optional.) Can the plan continue not to offer Roth contributions and limit catch-up contributions to only lower-paid employees (which would be pre-tax)? Or, must the plan eliminate catch-ups for all employees? Here, the IRS punted and asked for comments from the public before deciding.

We’ll let you know when the IRS issues official guidance on these issues.

https://www.irahelp.com/slottreport/more-roth-catch-contributions-delay

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on X: @theslottreport

Question:

My name is Bruce. I am 65 years old, and I have a question about the SECURE Act.

My mother died at age 89 on April 19, 2023, and I inherited her IRA. She had been receiving RMDs for years and most recently filed her 2022 tax return indicating she had received her last RMD in December 2022.

I am confused about the 10-year requirement to exhaust all the monies in the inherited IRA account. I have read portions of IRS Publication 509-B, and I thought that I could withdraw whatever amount I wanted as long as all money is exhausted at 10 years after my mother’s death.

But upon further research, it looks like I need to withdraw money (an RMD) from my IRA by December 31, 2023, and annually thereafter until 10-year rule is exhausted.

Thank you.

Answer:

Hi Bruce,

You are not alone! There has been much confusion about the 10-year rule that applies to many beneficiaries after the SECURE Act.

Initially after the SECURE Act was enacted back in 2020, it was believed by most that there would be no annual distributions required during the 10-year payout period. However, the IRS took a different position in its proposed regulations released in 2022. In the proposed regulations, the IRS said that if the account owner died after RMDs were required to start, then RMDs must continue during the 10-year period. (In your case, the first annual RMD would be required in 2024, the year after the year of your mother’s death, not in 2023.)

This was a surprise to many, so the IRS has stepped in and said that no penalties will be assessed for RMDs not taken during the 10-year period for 2021, 2022 and 2023. We will have to wait for future guidance to determine whether you must an RMD in 2024 (the first year of your 10-year period) or in future years.

However, as your mother’s IRA beneficiary, you must definitely take the RMD your mother would have taken in 2023 had she not died. This year-of-death RMD must be taken by the due date of your 2023 tax return, including extensions.

Question:

Hello,

I know that there are provisions in SECURE 2.0 to move 529 funds to a Roth IRA beginning in 2024, but I would like to know if the same is true for Education Savings Accounts (ESAs)?

Thank you,

Richard

Answer:

Hi Richard,

SECURE 2.0 allows funds from a 529 plan to be moved to a Roth IRA beginning in 2024, with some significant limitations, including waiting periods. This new rule does NOT apply to ESAs. ESA funds will not be allowed to be moved directly from an ESA to a Roth IRA next year. However, ESA funds can be moved to a 529 plan. It may be possible to move funds from an ESA to a 529 plan and then to a Roth IRA, provided all the requirements (and there are quite a few) are met.

https://www.irahelp.com/slottreport/10-year-rule-and-529-plans-todays-slott-report-mailbag

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on X: @theslottreport

Many IRA assets will ultimately go to nonspouse beneficiaries. When these beneficiaries inherit the funds, special rules kick in. Inherited IRAs are not like your own personal IRA account. Here are seven rules for inherited IRAs that may surprise you if you are a nonspouse beneficiary:

1. You cannot contribute to your inherited IRA. You cannot make contributions to an inherited IRA. If you do have your own IRA, you cannot add those funds to the Inherited IRA or vice versa.

2. You can move your inherited IRA. If you are unhappy with the investment choices or the custodian, you can move your inherited IRA to another custodian, and you can select different investment options. However, you must move the account by direct transfer, and the new account must be an inherited IRA as well. As a nonspouse beneficiary, you cannot take a distribution and then roll it over within 60 days.

3. You may be able to do a QCD. If you are charitably inclined, you may be able to take advantage of a qualified charitable distribution (QCD) and move up to $100,000 of your IRA funds (annually) directly to the charity of your choice in a tax-free transfer. To do a QCD you must be 70 ½ or older.

4. You cannot convert your inherited IRA. Many times nonspouse beneficiaries are interested in having a Roth IRA. Unfortunately, the rules do not allow nonspouse IRA beneficiaries to convert inherited IRAs to Roth IRAs.

5. You may be subject to annual required distributions, or the 10-year rule at a minimum. You can’t keep the funds in your inherited IRA forever. If you inherited the IRA funds in 2020 or later, as a nonspouse beneficiary you will most like be subject to a 10-year payout-period, possibly with annual RMDs during the 10 year period. Certain eligible designated beneficiaries who inherit in 2020 or later and those beneficiaries who inherited prior to 2020 may be still be able to stretch RMDs over life expectancy.

6. Your distributions may be taxable, but there will be no penalty. Inherited IRAs are never subject to the 10% early distribution penalty. However, if you inherit a traditional IRA, it is likely that the distributions you take will be taxable. If you inherit a Roth IRA, you are more fortunate from a tax perspective. Distributions from an inherited Roth IRA will most likely be tax-free.

7. You should name a successor beneficiary. When you inherit an IRA, it makes sense to name a beneficiary. If you don’t, the default provisions in the IRA document are likely to apply. In many cases this would mean the funds would go to your estate which can mean more taxes and the time and expense of probate.

https://www.irahelp.com/slottreport/rules-inherited-iras-may-surprise-nonspouse-beneficiaries

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on X: @theslottreport

The lunacy of IRA beneficiary payout rules continues to boggle the mind. As I guide advisors through the options available to their clients, various nuances present one unique scenario after another. Did the original IRA owner pass away before or after the establishment of the SECURE Act? How old was the person when they died? Who was the beneficiary? Is this a successor beneficiary situation? Ultimately, by following the individual fact patterns, definitive answers materialize.

However, on occasion, I am still astounded by the complexity of some situations. How in the world could a normal person, unaffiliated with retirement accounts as a hobby or profession, figure this stuff out? The answer is, they cannot. If financial advisors with decades of experience are exasperated, how must the general public feel?

One such beneficiary question came across my desk last week. Sadly, a relatively young father (49) passed away in late 2022 and left his traditional IRA to his then-19-year-old daughter. (She is now age 20 in 2023.)  The advisor sent me the details, asked if Notice 2023-54 would apply, and requested confirmation of the payout options. Here is my email response:

When a person dies before their required beginning date (which Dad did here), an eligible designated beneficiary (EDB) has a choice – stretch or the 10-year rule. In this case, Daughter qualifies as an EDB minor. However, since she was already 19 in the year of death, her stretch (if she chooses) is only good for 2023 and 2024 when she is 20 and 21. Then her 10-year rule begins in 2025 and will last until 2034. Since RMDs were turned on by her with the 2 years of stretch, she will also have RMDs in years 1 – 9 of the 10-year rule. These RMDs will follow the same single life expectancy factor she was already using when she was 20 and 21. (There is no waiver of her 2023 stretch RMD. Notice 2023-54 is not applicable in this situation.)

If, however, she chooses the 10-year rule to start immediately, her 10-year window will start in 2023 and run until 2032. She will not have any RMDs for the entire 10-year period because Dad died prior to his required beginning date, and Daughter never turned RMDs on with a stretch.

So, these are her choices:

• 12-year payout window with annual RMDs and a closing year of 2034, OR
• 10-year payout window with no RMDs and a closing year of 2032.

In this real-life scenario, items under consideration included the definition of an EDB, the ages of the deceased and the beneficiary, the ability for an EDB to choose a payout structure, the “springing” nature of the 10-year rule when an EDB minor turns 21, the “at least as rapidly” rule, and the application of IRS Notice 2023-54.

And the now-20-year-old beneficiary who lost her father less than a year ago is supposed to navigate this mess on her own? No chance. This is madness.

https://www.irahelp.com/slottreport/ira-beneficiary-payout-rules-%E2%80%93-madness-continues

By Ian Berger, JD
IRA Analyst
Follow Us on X: @theslottreport

Last Friday afternoon (August 25, 2023), the IRS gave employer plans two more years to comply with the controversial SECURE 2.0 rule requiring “catch-up contributions” for high-paid employees to be made on a Roth basis. The effective date of the rule was postponed from January 1, 2024 to January 1, 2026. The delay is set forth in IRS Notice 2023-62.

Most 401(k), 403(b) and governmental 457(b) plans allow age 50-or-older employees to make catch-up contributions on top of regular elective deferrals. The limit for catch-ups in 2023 is $7,500, allowing for total deferrals of up to $30,000.

Beginning in 2024, SECURE 2.0 requires that certain high-paid employees who want to make catch-ups must have them allocated to a Roth account. Mandatory Roth catch-ups only apply to employees who have “wages” above a certain dollar amount in the previous year. For 2024, that dollar amount would have been $145,000 of 2023 wages. There are several other new Roth provisions in SECURE 2.0 involving Roth SEP and SIMPLE contributions, Roth 401(k) employer contributions, and 529 plan-to-Roth IRA rollovers. But the catch-up rule is the only mandatory change.

Some of the country’s largest plan recordkeepers and retirement plan lobbying organizations had requested a postponement of the January 1, 2024 effective date, citing serious administrative problems with getting the rule into place on such short notice. The effect of the delay until January 1, 2026 is that until then no employees will be required to make catch-up contributions on a Roth basis and plans that don’t already offer Roth contributions won’t need to offer them.

The Notice also addresses a mistake Congress made when it drafted the mandatory catch-up provision in SECURE 2.0. Congress inadvertently deleted a part of the tax code with the result that no employees (high-paid or not) would be able to make any catch-up contributions (pre-tax or Roth) starting in 2024. This was an obvious mistake, and the IRS says it will turn a blind eye to it.

Notice 2023-62 also says that high-paid self-employed persons who have self-employment income instead of “wages” won’t be required to make catch-up contributions on a Roth basis – even if their income is above the dollar threshold. This was unclear under SECURE 2.0.

https://www.irahelp.com/slottreport/irs-delays-effective-date-mandatory-roth-catch-rule-until-2026

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on X: @theslottreport

QUESTION:

Hello!  I recently came across one of your articles and decided to reach out to you in hopes of getting some clarification re: the Secure Act 2.0 and distributions as a qualified public safety employee. In a nutshell, I am a 17-year career firefighter for a county government. With the new Secure Act 2.0, it seems as though I can take distributions after 25 years of service, OR age 50, whichever comes first, without penalty. If this is true, would I be eligible to begin taking distributions at age 47, without penalty? However, I am NOT eligible to retire from my county service until I reach age 55. So, if I separate from service (aka resign) at age 47, with 25 years of service, what would I need to do with my 401(k) in order to be able to begin taking penalty-free distributions? Any help is appreciated.

Thanks,

Brandon

ANSWER:

Brandon,

You are correct that an age 50 exception to the 10% early distribution penalty exists for certain public safety employees, including firefighters. SECURE 2.0 extended the age 50 public safety exception to private sector firefighters and corrections officers who are employees of state and local governments. SECURE 2.0 also modified the exception to apply upon the lesser of age 50 or 25 years of service. If you resign at age 47 and have 25 years of service, there is nothing special you need to do with your 401(k). You can take distributions from the plan, and they will be exempt from the 10% early withdrawal penalty. (Also, do not roll your plan to an IRA if you want to continue to use the age 50 exception. The rule only applies to distributions taken from the plan.)

QUESTION:

Hi there,

If a plan participant is 75 and still working, but they decide to rollover funds mid-year to an IRA for an in-service rollover, does the RMD apply for those funds?

Thanks,

John

ANSWER:

John,

If the work plan includes the still-working exception (not all do), and if that employee works through the end of the calendar year, then no RMD applies in that same year. As such, no RMD need be taken prior to the rollover. If, however, the person separates from service at any time during the year of the rollover, the RMD will apply and must be taken prior to the rollover.

https://www.irahelp.com/slottreport/age-50-exception-and-still-working-exception-todays-slott-report-mailbag

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on X: @theslottreport

When an IRA or retirement plan owner reaches a particular age, that account owner typically must begin taking required minimum distributions (RMDs.) The RMD is calculated based on the year-end account balance divided by a life expectancy factor. Of course, there is a parade of variables to consider, including:

• Are we using the Uniform Lifetime Table or the Joint Life Table?
• Is this an inherited account and therefore using the Single Life Expectancy Table?
• At what age do lifetime RMDs begin – 70 ½, 72 or 73?
• If this is a work plan like a 401(k), do RMDs even apply if the person is still working?
• Is this a Roth IRA? If so, lifetime RMDs do not apply.
• Is this an inherited Roth IRA? If so, RMDs could potentially apply.
• Do I consider the Roth money in my 401(k) in the RMD calculation? (No, starting 2024.)
• Which accounts can be aggregated for the RMD calculation, and which cannot?

On and on the list goes. Is it any wonder some people freeze in the spotlight? Is it any wonder RMDs get missed? Of course not. And in the past, if all or a portion of an RMD was not timely withdrawn, there was a significant penalty of 50%. (That penalty has since been reduced to 25% by SECURE 2.0, and further to 10% if the error is corrected within, typically, two years.)

Fortunately, if an RMD was missed, the IRS has been agreeable to waiving the penalty for good cause. In fact, the proposed SECURE Act regulations added a couple of automatic missed RMD penalty waivers in certain situations – like for a missed year-of-death RMD if the RMD is taken by the beneficiary’s tax filing deadline, including extensions.

Additional RMD penalty waiver language contained in Section 313 of SECURE 2.0 has, curiously, received less fanfare. This section adds a 3-year statute of limitations for missed RMDs. Meaning, if an RMD is missed, the 25% penalty is only applicable for the next three years. After that, it falls off the books.

Example: Robert inherited an IRA from his sister back in 2017. He was supposed to start taking annual RMDs in 2018, but he did not. In fact, Robert has never taken an RMD from the inherited IRA. Prior to SECURE 2.0, Robert faced a potential penalty for every year he missed taking the RMD. However, under the new guidelines, Robert may only need to be concerned about the previous 3 years – 2020, 2021 and 2022. And in fact, since the CARES Act waived all RMDs for 2020, Robert may only have two years of missed RMDs to account for – 2021 and 2022.

But be forewarned! SECURE 2.0 is not perfectly clear. The legislation is not precise. The example above is one interpretation of the law. Others argue that the 3-year statute of limitations begins with the enactment date of SECURE 2.0 – which was the end of 2022. This more conservative analysis believes the missed RMD penalty still applies in years prior to SECURE 2.0 (meaning Robert in the example above must still account for 2018 and 2019).

Nevertheless, be aware that a 3-year statute of limitations for missed RMDs does, in fact, exist. How the legislation is to be applied awaits IRS guidance.

https://www.irahelp.com/slottreport/3-year-statute-limitations-%E2%80%93-missed-rmds

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on X: @theslottreport

Question:

I am struggling to find an answer to my situation. My wife’s 82-year old father passed away about 8 years ago and he was taking IRA distributions. A portion of his IRA was inherited.  Since then, my wife had been taking RMDs based on her life expectancy as an old stretch IRA. My wife passed away on 10/1/20 at 57 after the SECURE Act was passed. I am currently 59 and have now become a successor beneficiary to this IRA, but I have not found clear guidance on whether I need to take RMDs in years 1-9 (which I haven’t so far) or simply need to drain the account within 10 years.

Answer:

The rules for successor beneficiaries can be a little tricky. As a successor beneficiary, you are subject to the 10-year rule. The 10-year period began in the year of the original beneficiary’s (your wife’s) death. In your case, that would mean that the inherited IRA would need to be emptied by 2030.

As far as annual RMDs in years 1-9 go, there is a lot of confusion in this area. IRS proposed regulations do require successor beneficiaries to continue taking RMDs if the original beneficiary was already taking them, as your wife was. However, recent IRS guidance has excused these RMDs for 2021, 2022, and 2023. So, this year you do not need to take anything. The rules in future years remain unsettled. Hopefully, the IRS will clear these issues up soon.

Question:

I have a Thrift Savings Plan that I would like to transfer to a traditional IRA at a brokerage. I also have a separate Roth IRA with a broker that I would like to merge with a larger Roth.  Can I roll over both in the same year?

Answer:

It is important to understand the distinction between an IRA rollover and an IRA transfer. With a rollover, the funds are distributed to you and then within 60 days you deposit those funds back into an IRA. With a transfer, the funds move directly from one IRA custodian to another IRA custodian.

Transfers are the best way to move funds between IRAs because you avoid issues with both the 60-day rule and the once-per-year rollover rule.

The once-per-year rollover rule prevents you from doing a 60-day IRA rollover of a distribution that occurs within 12 months of a prior distribution that was rolled over. This rule only applies to IRAs. It does not apply to plans. Therefore, your rollover from your Thrift Savings Plan would not prevent you from doing a 60-day rollover with your Roth IRA.

Transfers between IRAs are not subject to the once-per-year rollover rule. You can do as many transfers as you want during a 12-month period.

https://www.irahelp.com/slottreport/successor-beneficiaries-and-ira-rollovers-todays-slott-report-mailbag

By Ian Berger, JD
IRA Analyst
Follow Us on X: @theslottreport

If you are subject to required minimum distributions (RMDs) and have annuitized part of your IRA, a recent law change could drastically reduce your RMDs. But, without IRS guidance, it may be difficult to take advantage of that change.

When an annuity within an IRA is annuitized, RMDs are calculated differently than they are for the non-annuitized IRA portion of that IRA (or of other IRAs you own). For the non-annuitized portion, you divide the prior-year account balance by your life expectancy factor under the IRS Uniform Lifetime Table. But for the annuitized part, the annuity payments you receive during a year are considered the RMD for that year.

Typically, this annual amount is larger than the RMD that would be required if the annuitized portion of your IRA was determined under the non-annuitized RMD method (i.e., prior-year account balance divided by life expectancy). However, under the rule in effect before SECURE 2.0, you couldn’t credit this overage against the RMD for the non-annuitized part of your IRA. In other words, you had two separate RMDs – one for the annuitized part of your IRA portfolio and one for the non-annuitized part.

Example 1: Amy turned age 73 this year and is required to take a RMD for 2023. In late 2022, Amy purchased an annuity with $250,000 of her funds in IRA-A that will start paying her a monthly benefit of $1,250 in January 2023. As of December 31, 2022, Amy also has $200,000 in IRA-B which is invested in mutual funds. For 2023, Amy will receive $15,000 ($1,250 x 12) of annuity payments from IRA-A, and that will satisfy her RMDs for IRA-A. However, under the old RMD rule, Amy would also have to take a separate RMD of $7,547.17 ($200,000/26.5) from IRA-B.

SECURE 2.0 changes this rule. Starting in 2023, you can get credit for the fact that the annuitized portion produces a higher RMD than if that portion wasn’t annuitized. To use the new rule, you combine the value of the annuitized and non-annuitized portions of your IRA portfolio as of the end of the prior year and divide that sum by your applicable life expectancy factor. This becomes your total RMD for the year. You then subtract the annual annuity payment from the combined RMD to determine how much of the total RMD remains and must be taken from the non-annuitized portion.

Example 2: If the value of Amy’s annuity as of December 31, 2022 was $250,000, under the new rule, her total 2023 RMD would be $16,981.13 [($250,000 + $200,000)/26.5]. $15,000 of that total RMD would be satisfied by the IRA-A annuity payments, requiring Amy to take only $1,981.13 from IRA-B. This is about $5,500 less than under the old rule.

So, what’s the problem? The problem is that you need a valuation of the annuity to use the new RMD rule, and SECURE 2.0 doesn’t say how to obtain that valuation. The insurance company is supposed to report to you the fair market value of your annuity annually on Form 5498. But once an annuity is annuitized, that doesn’t always happen or, if it does happen, the reported valuation may not be one you can rely on. So, until we get IRS guidance on what constitutes a proper valuation, it may be challenging for you to take advantage of the new RMD rule.

https://www.irahelp.com/slottreport/new-law-may-lower-rmds-when-annuity-annuitized-%E2%80%93-irs-guidance-needed

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on X: @theslottreport

The IRS unleashed massive confusion last year. To the surprise of many, it released proposed SECURE Act regulations requiring beneficiaries (on some occasions) to take required minimum distributions (RMDs) during the 10-year payout period.

To help with the confusion, the IRS issued some transitional relief. Last year, the IRS issued Notice 2022-53, which waived penalties for missed 2021 and 2022 RMDs within the 10-year period. Recently, the Service released Notice 2023-54, which extends the penalty waiver to cover missed 2023 RMDs when the death occurred in 2020 or 2021. It also excuses the penalty for missed 2023 RMDs within the 10-year period when the death took place in 2022.

At first it may seem that every beneficiary who is subject to the 10-year rule and would otherwise be required to take an RMD for 2023 should take advantage of the opportunity to skip their 2023 RMD. It may seem like a no brainer to keep the funds in the account if not needed and avoid an immediate tax bill. However, this may not actually be a smart planning move.

Why? Well, anyone who is eligible for this relief also has the 10-year deadline looming. It may be tempting to skip an RMD for 2023, but that could mean more pain later when a potentially larger tax bill comes due at the end of the 10-year holding period. A better strategy may be to say ‘no thank you’ to the IRS RMD relief allowing you to take nothing – maybe for the third year in a row! Instead, take advantage of the waiver to do some flexible distribution planning.

Example: Debra, age 75, died in 2020. The beneficiary of her traditional IRA is her adult daughter, Brittany. Brittany is a non-eligible designated beneficiary subject to the 10-year rule under the SECURE Act. The proposed regulations say that because Debra died after her RBD, Brittany must take RMDs based on her single life expectancy during years 1-9 of the 10-year period. However, Notice 2022-53 said that if Brittany failed to do so for 2021 and 2022, there is no penalty on the missed RMDs. Notice 2023-54 extends this relief to the 2023 RMD.

Because Brittany is eligible for relief from the RMDs during the 10-year period for years 2021, 2022, and 2023, she could take nothing in 2023 for a third year in a row. However, she may want to consider taking distributions anyway to minimize the tax hit in future years. Despite Notices 2022-53 and 2023-54, drawing down the inherited IRA throughout the 10-year period while being cognizant of current tax brackets could be a wise tax planning strategy.

https://www.irahelp.com/slottreport/rmd-relief-no-thank-you

By Ian Berger, JD
IRA Analyst
Follow Us on X: @theslottreport

Question:

I’m age 76. My brother died in December 2022 at 84. Do I take required minimum distributions (RMDs) for the inherited account based on my age or on my brother’s age at death?

Answer:

Since you’re an “eligible designated beneficiary” (not more than 10 years younger than your brother), you can stretch RMDs over your lifetime. Your first RMD, due 12/31/2023, is based on the age you will turn in 2023. Your corresponding life expectancy for the 2023 RMD is found in the IRS Single Life Expectancy Table. You subtract one from that life expectancy for the 2024 RMD and continue to subtract one for each succeeding year. Divide the applicable factor into the prior year-end account balance. So, if you turn 76 this year, you’ll use 14.1 for the 2023 RMD and divide that into the 12/31/2022 balance, 13.1 for the 2024 RMD, and so forth.

Question:

Does a Roth IRA nonspouse (grandson) beneficiary have to take yearly RMDs or he can take the entire distribution in the tenth year? Thank you for your help with this!

Asha

Answer:

Hi Asha,

A grandson is a “non-eligible designated beneficiary” and must always empty the inherited account by the end of the tenth year following the year of death. However, if the inherited account is a Roth IRA, annual RMDs during years 1-9 of the 10-year period are never required – no matter how old the Roth IRA owner was at death. A Roth beneficiary has total flexibility as to how much or how little he takes each year. He only has to draw down the entire account by the end of the 10-year period.

https://www.irahelp.com/slottreport/inherited-ira-and-roth-ira-rmd-rules-today%E2%80%99s-slott-report-mailbag

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on X: @theslottreport

As already-complicated IRA rules spiral further into an abyss of confusion, it comes as no surprise that irregularities exist. Up is down and left is right. Green means stop, red means throw your hands up in exasperation. And those in charge recognize the lunacy. Case in point: “Many parts of the tax code are compromises, and all parts reflect the need for lines that can’t be deduced from first principles…The Code’s lines are arbitrary.” (Young Kim v. Commissioner; U.S. Court of Appeals, 7th Circuit, No. 11-3390; May 9, 2012). Here are three such random anomalies and exceptions baked into the “arbitrary” lines of the tax code.

Excess Contribution: Earnings Can Stay…After the Deadline

To contribute to any IRA, a person or her spouse must have earned income (compensation). But too much income precludes one from contributing to a Roth IRA. Oftentimes, confusion over the rules (or just plain negligence) leads to an ineligible deposit – i.e., an excess contribution. But no worries. There are corrective steps in place to alleviate the problem. An excess contribution can be fixed with no penalty by October 15 (generally) of the year after the year for which the contribution was made. If the fix is made prior to this deadline, the excess and any earnings (technically “net income attributable,” or “NIA”) can be withdrawn penalty-free. The earnings will be taxable, but no special tax forms need be filed.

Anomaly: In a strange twist, if the excess contribution is corrected after the October 15 deadline, the NIA does not need to be withdrawn. There is a 6% annual penalty on the excess, and that excess must be removed from the account, but any earnings can remain. This is true even if the IRA owner was totally ineligible to open the account in the first place.

Roth Conversion: Inherited IRA vs. Inherited 401(k)

When a traditional IRA owner dies and his IRA is passed to a beneficiary, that beneficiary must maintain the account as an inherited IRA. The inherited account cannot then be converted to an inherited Roth IRA. An inherited IRA owner could take withdrawals from the inherited account and use that money to make annual contributions to his own Roth IRA (assuming eligibility rules are met), but no direct conversions are allowed.

Anomaly: While inherited traditional IRAs cannot be converted to an inherited Roth IRA, employer plan designated beneficiaries (living people) can convert inherited plan assets – like from a 401(k) – to an inherited Roth IRA. Go figure.

Roth and After-tax Dollars: No Rollover from IRA to Plan

Speaking of Roth IRAs and plans, Roth and after-tax (non-Roth) money cannot be rolled from an IRA to a work plan, i.e., 401(k). Once those dollars hit an IRA, that is the end of the road. Only pre-tax monies can be moved from an IRA to a work plan. Sometimes referred to as a “reverse rollover,” this is an exception to the pro-rata rule and can be leveraged in cases when IRA owners are trying to separate their pre-tax IRA dollars from basis (after-tax dollars) in order to complete a “clean” tax-free Roth IRA conversion.

Why can’t Roth IRA dollars be rolled to a plan? Why do these anomalies exist? I have no idea. Left is right and white is black. To further quote the Young Kim v. Commissioner case: “This makes no sense.”

https://www.irahelp.com/slottreport/anomalies-and-exceptions

By Ian Berger, JD
IRA Analyst
Follow Us on X: @theslottreport

If you’re facing the unpleasant prospect of paying college bills for the fall semester, you may be thinking of tapping into your retirement savings to help with the costs. If you’re under age 59 ½, there is an exception to the 10% early distribution penalty for higher education expenses. But there are several rules you need to follow:

• Don’t take it from your company plan. Penalty-free withdrawals for higher education are only available from your IRA (including SEP and SIMPLE IRAs). If you take an early distribution from your company plan, you’ll be hit with the 10% penalty.

• Watch the timing. There are no dollar limits on penalty-free withdrawals. But the distribution can’t exceed the amount of education expenses you pay in the same calendar year.

• Make sure the student qualifies. The expense must be for education of the IRA owner or his spouse, or for any child or grandchild of either. What about siblings, nieces, nephews and cousins? Sorry, they don’t qualify.

• Make sure the school qualifies. Any accredited post-secondary (post-high school) educational institution – including a foreign institution – qualifies as long as it’s eligible to participate in a student aid program administered by the U.S. Department of Education.

• Make sure the expense qualifies. Qualifying expenses include tuition, fees, books, supplies and equipment required by the school. A person must be considered at least a half-time student in order for room and board to qualify. Expenses for computers and related equipment used at school also qualify – even if not required by the school. However, expenses paid for with tax-free educational assistance (e.g., with scholarships, Pell grants or Coverdell education account distributions) aren’t eligible.

• Keep good records.  Retain good documentation of the expenses you paid for with the IRA funds. In case of an IRS audit, the burden is on you to prove the distribution was for a qualified education expense.

• File 5329. The IRA custodian will issue you a Form 1099-R showing an early distribution, but it won’t reflect an exception to the 10% penalty. It’s up to you to file Form 5329 with your federal tax return to claim the exemption.

• Use non-retirement funds first. Even if you qualify for the penalty exception, distributions from traditional IRAs are taxable. Also, withdrawals cause you to lose out on tax-deferred (or tax-free) growth in your IRA. So, if you have other non-retirement funds, you may want to tap into those first.

https://www.irahelp.com/slottreport/what-are-rules-penalty-free-higher-education-expense-withdrawals

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

Question:

Greetings,

If I have the beneficiaries on my IRA listed as my wife (50%) and two children over 21 (50%), is my wife still able to move her half of the IRA into her existing IRA when I am gone?  Or does having the adult children as partial beneficiaries inhibit her ability to do a spousal rollover to combine it with her existing IRA?

Thank you.

Stephen

Answer:

Stephen,

As long as your IRA is timely split after your death, your wife will still be able to complete a spousal rollover into her own IRA. This is often referred to as “separate accounting.” The deadline for your beneficiaries to set up separate inherited IRA accounts is December 31 of the year after your year of death. If that happens, your wife can do a spousal rollover. However, if this deadline is missed, your wife would not be permitted to do a spousal rollover and would be required to maintain the account as an inherited IRA.

Question:

I hope you can help me, please! I just inherited an inherited IRA from my sister who had inherited the IRA from her fiancé. There were only 4 years difference in age between my sister and I, but I am unsure of the age of her deceased fiancé. How do I determine if I’m an Eligible Designated Beneficiary or just a Designated Beneficiary?  And whose age do I use to determine the RMD requirements?

Any help/direction you can provide would be greatly appreciated!

Liz

Answer:

Liz,

Since you are inheriting an inherited an IRA, that makes you a successor beneficiary. I will assume your sister was taking stretch required minimum distribution (RMD) payments from the inherited IRA based on her own single life expectancy. As a successor, you will continue this exact same RMD schedule, using the same RMD factor that your sister was using. Essentially, you will step into her shoes for future RMD payments. Additionally, since you are a successor beneficiary, the 10-year rule also applies. So, continue RMD payments in years 1 – 9, but the account must be emptied by the tenth year after the year your sister’s death.

https://www.irahelp.com/slottreport/inherited-iras-and-rmds-todays-slott-report-mailbag-2

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

Are you thinking of naming a child or grandchild as your IRA beneficiary? With the start of the SECURE Act in January 2020, the rules for inherited IRAs were upended. Prior to the enactment of the SECURE Act, naming a minor as a beneficiary was a good way to take advantage of the stretch IRA. A grandparent could name a young grandchild as their IRA beneficiary and distributions could be paid from the inherited IRA for decades over the long life expectancy of the beneficiary.

The SECURE Act has changed everything. If you are looking to leave your retirement account funds to the next generation, you will need to rethink your estate planning strategy. Post SECURE Act, the rules have changed when it comes to naming a minor as a beneficiary. Now, the stretch IRA is gone for most beneficiaries, including minors. Many are subject to a 10-year payout rule.

Minor Children of the IRA Owner

There is a special rule for some minors. ONLY minor children of the IRA owner are considered to be eligible designated beneficiaries (EDBs) and can take required minimum distributions (RMDs) based on their single life expectancy until age 21. At that time, the 10-year rule would apply.

Under IRS proposed RMD regulations, annual RMDs would be required to continue during years 1-9 of the 10-year period, and the account would need to be emptied by the end of the tenth year.

Example: In 2020, Lisa, age 10, inherits an IRA from her mother. Lisa is an EDB and can stretch distributions over her single life expectancy. This goes on for 11 years. Lisa’s 21st birthday is in 2031. Because Lisa has reached the age of majority (age 21, regardless of state law), the 10-year rule will then apply. Lisa must continue to take annual RMDs in years 2032-2040 and must empty the inherited IRA by December 31, 2041 — the end of the 10th year after she reached age 21.

Grandchildren and Other Minor Beneficiaries

Minor beneficiaries who are NOT the child of the IRA owner cannot delay the 10-year rule until age 21. Other beneficiaries, such as grandchildren, nieces and nephews, are not considered EDBs and would also be subject to the 10-year rule immediately upon the death of the IRA owner. If the IRA owner died before his required beginning date (RBD), annual RMDs would not be required during the 10-year period.

Example: Kevin, age 75, dies in 2023. The beneficiary of his traditional IRA is his grandson, Daniel, age 10. Daniel does not qualify as an EDB because he is not the son of the IRA owner. Daniel will have to take annual RMDs from the inherited IRA based on his single life expectancy for years 2024-2032 (years 1-9 of the 10-year period) because Kevin died after his required beginning date. In addition, the entire remaining inherited IRA balance must be distributed by December 31, 2033.

https://www.irahelp.com/slottreport/what-you-need-know-if-you-name-minor-your-ira-beneficiary

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

There is no doubt we have written about this topic in past Slott Report entries. Possibly many times. There is also no doubt that people continue to make this same error, over and over again. Such was the case recently when the Ed Slott team visited with 150-plus financial advisors from across the nation in Boston. While presenting this material to the group, I joked that there is always someone in the crowd who turns ghost white upon hearing what I say. Sure enough, at the next break, an advisor approached me, hat in hand, and said, “I am the person who turned ghost white while you were speaking.” Why did all the blood rush from his face? Because he realized he had repeatedly made the same mistake with many of his clients, and those Roth-conversion-error chickens were about to come home to roost.

When a person does a Roth conversion, that transaction will be taxable, and there is no way to reverse the decision to convert. You cannot un-ring that bell or put the converted Roth toothpaste back into the traditional IRA toothpaste tube. What’s done is done. We could quibble over the pro-rata rule and how much of the conversion is taxable, but that is not the point of this article. Assume no after-dollars exist and this is a 100% taxable matter.

It is our advice to pay the taxes due with other, non-qualified assets – like money from your checking account. This way the entire amount of the conversion moves into the Roth IRA, and the entire amount begins to grow tax-free. However, not everyone has extra cash on hand to pay the conversion tax. So, another option is to pay all or part of the tax from the IRA – via withholding. For example, if I convert $100,000, the entire $100,000 is taxable. If I elect to have 20% withheld for taxes, only $80,000 moves into my Roth IRA. When tax time arrives, I will have already sent $20,000 to the IRS. Understandably, this softens the tax blow come April.

In and of itself, the above is not a problem. The trouble occurs when taxes are withheld on a Roth conversion for a person who is under 59 ½ years old. This is why the advisor in Boston turned ghost white. He realized he had taxes withheld for many of his younger clients. While his heart was in the right place – to help people transition from a “forever taxed” account to a “never taxed” account – his technique was terribly flawed.

What is the issue? Taxes withheld on a Roth conversion are not converted. Technically, the withheld dollars are a standard withdrawal that is sent to the IRS. For anyone under 59 ½, an early withdrawal is subject to a 10% penalty (assuming no other exception applies).

Example: John is 35 years old. He has a traditional IRA worth $100,000. John discussed the possibility of a Roth conversion with his advisor, but was concerned he did not have the extra funds available to cover the taxes due on the conversion. John’s advisor suggests having the taxes withheld from the IRA. This is bad advice, but John is unaware of the consequences. John converts the entire $100,000 and has $20,000 withheld for taxes. This $20,000 never gets converted. It is an early withdrawal, and John is hit with a 10% penalty of $2,000. John is furious. He contacts his advisor, but the call goes to voicemail. Ironically, John’s advisor is sitting in the crowd at an Ed Slott advisor training program. He is simultaneously turning ghost white as the speaker implores the audience to never have taxes withheld on a Roth conversion for anyone under 59 ½, for all the reasons discussed above.

https://www.irahelp.com/slottreport/roth-conversion-confusion-%E2%80%93-taxes-withheld-when-under-59-%C2%BD

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

Question:

I inherited an IRA in 2022 upon the passing of my father after he had already started his RMDs. I took a 2023 RMD from it in May 2023.  Your website says I’m not required to take this RMD. I called the custodian to reverse it, but they said it can’t be done. Is this true?

Wanda

Answer:

Hi Wanda,

In the recently released Notice 2023-54, the IRS has once again excused RMDs from inherited IRAs within the 10-year payout period. They did the same thing last year for RMDs for 2021 and 2022. This was in response to all the confusion caused by the proposed SECURE Act regulations unexpectedly requiring RMDs for some beneficiaries during the 10-year period. Unfortunately, the new relief does not help beneficiaries like you who already took 2023 RMDs. The rule that nonspouse beneficiaries cannot roll over a distribution from an inherited IRA still applies.

Question:

I bought and read Ed Slott’s book, “The New Retirement Savings Time Bomb”.

I earn too much money and can’t do a Roth IRA and want to save more than the traditional IRA allows. I know the book discussed the “back door” for those who earn more than the allowable contribution for the Roth IRA where they can contribute to a traditional IRA and then roll over to a Roth IRA.

Can this “back door” analysis be used for a sole proprietor with no employees by contributing to a SEP IRA and then rolling over to the Roth IRA. It seems like a loophole.

Thanks in advance.

Sincerely,

Victor

Answer:

Hi Victor,

A SEP IRA can be converted to a Roth IRA at any time, and there are no income limits on conversions the way there are for Roth IRA contributions. There would be nothing that would prevent a sole proprietor from making a SEP contribution and then converting those funds to a Roth IRA.

https://www.irahelp.com/slottreport/inherited-iras-and-roth-conversions-todays-slott-report-mailbag-0

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

Is your child or grandchild working hard this summer? A summer job can be a valuable experience for a young person. Whether it is making smoothies, serving tables, or being a camp counselor, a summer job can teach life skills and give a first opportunity to manage finances. An important part of managing finances is saving for the future. Why not help make contributing to an IRA part of a child’s summer job experience? They will get an early start on retirement savings while also learning how to save for the future.

Roth IRA Benefits

You may wonder whether a Traditional or Roth IRA would be the better choice for a young person who is just beginning to save for retirement. For younger people, many experts would say that a Roth IRA is more attractive than a Traditional IRA. Contributions to a Traditional IRA are deductible, but few young people will earn enough to benefit from deducting their Traditional IRA contributions. Roth IRA contributions are not deductible, but offer tax-free earnings if certain rules are followed.

By contributing at a young age, your child or grandchild will have the important advantage of time. The earlier funds are contributed to a Roth IRA, the more potential there is for tax-free earnings to accumulate. There is no minimum age for establishing an IRA under the law. Some IRA custodians may have policies restricting IRAs for minors, but many others will allow these accounts to be established.

For younger people, retirement may seem a long way away. They may worry that they will need the funds sooner for something else. A Roth IRA alleviates these concerns. If they need access to their funds, your child or grandchild will be able to take a distribution of tax-year contributions at any time, for any reason, without tax or penalty. If the Roth IRA remains open for five years, he or she will be able to take a tax-and-penalty-free distribution, including earnings, to purchase a first home.

Contribution Rules

An IRA contribution must be based on earned income or taxable compensation. Wages from a summer job would be considered taxable compensation. For 2023, the contribution is limited to the lesser of $6,500 or taxable compensation for the year. If your child or grandchild’s summer job earnings are less than $6,500, he or she would be limited to the amount earned. For example, if your daughter or granddaughter earned $2,000 this summer and had no other earnings for the year, she would be limited to contributing $2,000. You are not required to contribute the maximum amount for which you are eligible. Your daughter or granddaughter may decide she only wants to contribute $500. Any amount that is contributed to a Roth IRA is a good start!

A grandparent may also want to consider helping make an additional contribution. There is no requirement that the contribution actually be made from the wages earned by the young person. A grandparent could add the remaining $1,500 to the $500 already contributed to make the maximum Roth IRA contribution allowed for the year.

A summer job provides many benefits to a young person. A Roth IRA could be an important one. Starting a Roth IRA now with summer employment wages will enable your child or grandchild to begin saving early and learn valuable lessons about preparing for retirement and the future.

https://www.irahelp.com/slottreport/help-young-person-use-summer-earnings-start-roth-ira

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

On July 17, we reported that the IRS had issued required minimum distribution (RMD) relief in two situations. First, the Service excused 2023 RMDs for certain IRA (and plan) beneficiaries subject to the 10-year payout period. Second, it extended the  60-day rollover deadline for retirement account owners born in 1951 who erroneously received distributions in 2023 that weren’t necessary because their first RMD year had been delayed from 2023 to 2024 under SECURE 2.0. This relief was published in IRS Notice 2023-54. In this article, we’ll address several questions we’ve received about the IRS guidance.

Waiver of Missed 2023 RMDs

Q: Exactly who is affected by the waiver of 2023 RMDs?

A: The waiver is limited. It only affects beneficiaries who are bound by the 10-year payment rule and who inherited from a retirement account owner who had already reached his RMD required beginning date (generally, April 1 of the year after the year the owner turns 73). In that situation, the beneficiary must normally take annual RMDs in years 1-9 of the 10-year period (as well as empty the account by the end of the 10 years). But, because the IRS hasn’t finalized its RMD regulations, it’s excusing the annual RMD rule for 2023. Last October, the IRS also excused annual 2021 and 2022 RMDs for affected beneficiaries using the 10-year rule.

Q: Who is not affected by the waiver?

A: Both the recent guidance and the guidance from last October do not excuse 2021, 2022 or 2023 RMDs for the following groups:

• IRA or plan account owners taking lifetime RMDs.
• Eligible designated beneficiaries (EDBs) taking stretch RMDs. EDBs are surviving spouses; minor children under age 21; chronically ill or disabled individuals; or anyone not more than 10 years younger than the retirement account owner.
• Individual beneficiaries who inherited before 2020.

Q: If I am subject to the 10-year rule and received a 2023 RMD, can I roll it back?

A: The IRS relief doesn’t allow an affected beneficiary to roll back a 2023 RMD even though it wasn’t required. Without that relief, no rollover is possible since  RMDs cannot be rolled over.

Rollover Deadline Extension

Q: If RMDs cannot be rolled over, how are rollovers of 2023 “RMDs” paid to retirement account owners born in 1951 permitted?

A: Any distribution made in 2023 to someone born in 1951 is not a real RMD because those individuals had their first RMD year delayed until 2024. So, the IRS is allowing a rollover of distributions received before July 31, 2023 and is extending the usual 60-day deadline until September 30. In many cases, folks born in 1951 received these “RMD” distributions because SECURE 2.0 was passed so late in 2022 that custodians and recordkeepers didn’t have a chance to adjust their systems.

Q: If I was born in 1951 and received a 2023 distribution, can I do a Roth conversion?

A: The IRS guidance doesn’t specially address Roth conversions. But, since a conversion is a rollover, we believe a conversion can be done as long as the September 30 deadline is met. The unwanted “RMD” payment can be deposited directly to a Roth IRA. Of course, anyone doing a Roth conversion must pay taxes on the converted amount, so if the original distribution is deposited into a Roth, it will be taxable.

Q: If I make a rollover under the IRS guidance, will it count towards the once-per-year rollover rule?

A: The IRS says that a rollover of a 2023 distribution by someone born in 1951 won’t violate the once-per-year rule if another distribution was received in the prior 12 months that was also rolled over. But it will start a new 12-month period that will prevent a distribution received in the next 12 months from being rolled over.

https://www.irahelp.com/slottreport/qas-recent-irs-rmd-relief

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

Question:

Hi,

I have a question regarding solo 401(k)s. Does a solo 401(k) contribution affect the pro-rata rule when considering a backdoor Roth IRA?

Best,

James

Answer:

Hi James,

No. 401(k) assets are disregarded for the pro-rata rule on a backdoor Roth. That rule only takes into account traditional IRAs (both pre-tax and after-tax) and SEP and SIMPLE IRAs.

Question:

My question is in regard to RMDs under the SECURE Act for designated beneficiaries (adult children) inheriting an IRA due to the death of a parent.

Example: Mom passed away at age 61. She had not reached her required beginning date for her own RMDs.

Can the adult children let the monies accrue in their inherited IRAs for 10 years and then close the account(s) at the end of the 10th year? Or must they start taking annual RMD distributions and then close the account(s) at the end of the 10th year after the death of the parent?

Thank you very much.

Thomas

Answer:

Hi Thomas,

The IRS published proposed SECURE Act regulations in February 2022. Those regulations say that certain beneficiaries subject to the 10-year rule must empty the inherited IRA by the end of the 10th year after the year of death and take annual RMDs in years 1-10 of the 10-year period. However, the annual RMD requirement only applies if the IRA owner dies on or after his RMD required beginning date (generally, April 1 of the year following the year he turns age 73). In your example, Mom died before her required beginning date, so the children are not required to take annual RMDs within the 10-year period.

https://www.irahelp.com/slottreport/backdoor-roth-iras-and-beneficiary-rmds-today%E2%80%99s-slott-report-mailbag

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

We say in our training manuals that “the SECURE Act obliterates IRA trust planning.” That’s an aggressive word – “obliterates” – but it is accurate. We also shout from the mountain top that every trust created prior to the SECURE Act and named as an IRA beneficiary must be reviewed, potentially rewritten, or scrapped altogether. What was a perfectly effective planning strategy a couple of years ago could be totally useless now. Here’s how and why…

Example: The year is 2018, two years prior to the SECURE Act, and all living IRA beneficiaries are still allowed to stretch annual required minimum distribution (RMD) payments.

John, age 60, has a $2 million dollar IRA. His wife pre-deceased him, and his only heir is his son, Billy, age 25. Billy is a terror and has an extreme gambling addiction. John wants to leave his IRA to Billy, but he cannot trust that Billy will be anywhere near responsible with the money. So, John decides to name a trust as his IRA beneficiary, with Billy as the sole trust beneficiary. The trust language dictates that only RMDs are to be paid to Billy (based on Billy’s single life expectancy). With a trust as beneficiary, Billy is precluded from invading the account. Robert rests easy knowing he will provide Billy annual income for life, while still protecting the $2 million from getting burned down at a casino over a long weekend.

Fast forward to 2020. The SECURE Act has been passed and stretch RMD payments are eliminated for most beneficiaries. The 10-year rule is created. John does not update his trust or review any of his estate planning goals. The original trust with its original language remains the beneficiary of John’s $2 million IRA…and Billy is still a terror.

It is late 2020, and John dies.

Upon reviewing the IRA beneficiary form, it is determined the trust is the beneficiary. As such, a trust-owned inherited IRA is created (with Billy as the beneficiary of the trust). The custodian properly identifies Billy as a non-eligible designated beneficiary and correctly determines the 10-year rule applies. John was only 62 when he died and was not yet taking RMDs. Consequently, the trust-owned inherited IRA will not have RMDs in years 1 – 9 of the 10-year rule.

The now-antiquated language of the trust – created just 2 years previous – dictates that only RMDs are to be paid out of the inherited IRA. The custodian and trustee of the trust follow the legal language of the trust precisely. There are no RMDs in years 1 – 9, so for nine years the inherited IRA just sits there, untouched. But at the end of year 10, the SECURE Act dictates that whatever remains in the account must be distributed. This is essentially the final RMD.

Since the trust language says to only pay out RMDs, and since the final payment in year 10 is considered the final RMD, the trust has no choice but to pay a full lump sum distribution of the entire inherited IRA to the trust, and then distribute those dollars to the trust beneficiary.

Had John reviewed the trust post-SECURE, he could have avoided this catastrophic scenario and designed an alternative beneficiary plan. Instead, 10 years after his death, John spins in his grave while multi-millionaire Billy the Kid hoots and hollers all the way to Vegas.

https://www.irahelp.com/slottreport/trust-ira-beneficiary-%E2%80%93-potentially-catastrophic-problem

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

If you’re an IRA beneficiary subject to the 10-year payout period and would have had a 2023 RMD (required minimum distribution), you’re in luck. In Notice 2023-54 issued last Friday (July 14), the IRS said it would excuse those RMDs. The IRS also said it would extend the 60-day rollover deadline for IRA (and plan) account owners born in 1951 who received distributions in 2023 that weren’t necessary because of the SECURE 2.0 change that delayed their first RMD year from 2023 to 2024.

Relief for Missed 2023 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” (NEDBs) 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 for NEDBs if the account owner died on or after his required beginning date (generally, April 1 of the year after the year the owner turns 73).

The IRS position meant that NEDBs of account owners who died in 2020 after their required beginning date should have taken their first required distribution in 2021 (year 1 of the 10-year period) – even though nobody thought that was necessary until February 2022 (when the proposed regs came out).

Even the IRS realized this was unfair. So, in October 2022, the IRS issued Notice 2022-53, which said that it would excuse RMDs for anyone in this group of NEDBs who missed 2021 RMDs. For good measure, the IRS also relieved RMDs for missed 2022 RMDs for this group. And, it gave relief for 2022 RMDs for NEDBs who inherited in 2021 from an account owner who died after his required beginning date.=

Notice 2023-54 extended that relief even further. The new Notice added another year of relief by waiving 2023 RMDs for NEDBs of IRA owners who died in 2020 or 2021 after the required beginning date. It also excused 2023 RMDs for NEDBs of owners who died in 2022 after the required beginning date.

So, if you’re an NEBD and inherited in 2020 from an IRA owner who died after the required beginning date, your first three years of annual RMDs (2021, 2022 and 2023) are now waived. If you’re an NEBD and inherited in 2021 from an owner who died after the required beginning date, your first two years of RMDs (2022 and 2023) are waived. And, if you’re an NEDB who inherited in 2022 from such an IRA owner, your first year of RMDs (2023) is forgiven.

60-Day Rollover Relief

Notice 2023-54 also gave relief if you’re an IRA owner born in 1951 and you received (or will receive) an unwanted distribution between January 1 and July 31, 2023 that you want to roll back. If you celebrate your 72nd birthday this year, your first RMD year would have been 2023 under the original SECURE Act, but it is now 2024 under SECURE 2.0. This is because SECURE 2.0 delays the age for beginning RMDs from age 72 to age 73. Due to the late enactment of SECURE 2.0, some IRA custodians and plans may have inadvertently paid you “RMDs” that were not technically RMDs (because of the SECURE 2.0 change). If you don’t want these distributions, the IRS is giving you until September 30, 2023 to roll the funds back.

https://www.irahelp.com/slottreport/irs-excuses-missed-2023-rmds-within-10-year-payment-period-and-provides-60-day-rollover

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

QUESTION:

Dear Mr. Slott,

I have a client who, during 2022, was separated from employment, turned 55, and took a distribution from his former employer’s 401(k) account. We properly used the Rule of 55 exception to avoid the 10% early withdrawal penalty. During 2023 (without consulting me), he rolled the remaining balance of that former employer’s 401(k) account into an IRA, and THEN took a distribution from that IRA account. Does the 10% penalty apply to this distribution?

Thanks,

Mark

ANSWER:

Mark,

Your client should have consulted with you prior to the rollover or subsequent distribution from the IRA. The age-55 penalty exception is only applicable to the plan where the person separated from service at age 55 or later. If those plan dollars are then rolled over to an IRA, the exception is lost. The age 55 exception is never available for distributions from IRAs. In the scenario you described, the 10% penalty will apply to your client’s IRA withdrawal, unless another exception applies.

QUESTION:

Hi,

We have a client that passed away with an IRA from which he was taking RMDs. In addition, the deceased client had an inherited IRA from his mom…she passed several years ago (pre-2020) and he was taking life expectancy RMD’s from the inherited account. For his three heirs, can we combine his own IRA and his inherited IRA into one account for each of them? Under current rules, the heirs will have to clean out both accounts in ten years (as well as take life expectancy distributions in years 1-9). From an administrative perspective, since all the accounts have to be fully depleted in ten years, it would be much easier not to have an additional three inherited accounts for each of the beneficiaries.

ANSWER:

No, you cannot mix the inherited IRA with the deceased client’s own IRA. Two separate inherited IRAs will have to be set up for each of the 3 beneficiaries (6 accounts total). Each beneficiary will receive an inherited IRA from the deceased client (as the direct beneficiary), and the inherited IRA that the client inherited from his mom (they are successor beneficiaries on this IRA – the beneficiaries of the beneficiary).

Each inherited IRA of your client’s OWN account will have to be emptied under the 10-year rule. In addition, each of these inherited IRAs will be subject to RMDs for years 1-9 of the 10-year term. These RMDs will be based on the beneficiaries’ own single life expectancy.

For the successor beneficiary accounts, each beneficiary will use the deceased client’s remaining term for years 1-9, not their own ages. In essence, each beneficiary will “step into the shoes” of the deceased and continue his exact same RMD schedule for years 1 – 9, then deplete the account at the end of year 10.

https://www.irahelp.com/slottreport/age-55-exception-and-inherited-iras-todays-slott-report-mailbag

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

You can have too much of a good thing. While it is a good strategy to contribute to an IRA, some contributions are not allowed. When a contribution is not permitted in an IRA, it is an excess contribution and needs to be fixed. Some excess contributions are pretty easy to understand. Others are a little more complicated. Here are 5 ways an excess IRA contribution can happen:

1. Exceeding the Limit

If you contribute more than the annual limit to an IRA, that will be an excess contribution. For 2023, the limit is $6,500 for those under age 50 and $7,500 for those who are age 50 or over. This may seem like an easy rule to follow. You may wonder who is going around contributing tens of thousands of dollars to IRAs in violation of the contribution limits and, in fact, most IRA custodians will not accept contributions over the yearly limit. However, an individual with multiple IRAs with different custodians could exceed the limit by contributing to each of them.

2. Not Enough Earned Income

A more frequent occurrence is an IRA owner not having sufficient earned income or taxable compensation to fund an IRA contribution for the year. While you can use a spouse’s taxable compensation to fund your IRA, you may not use a multitude of different income sources including Social Security, rental income and investment income. You may have a high income, but not be eligible to fund an IRA. If you go ahead anyway, the result is an excess IRA contribution.

3. Income Is Too High for Roth Contribution

A common cause of excess Roth IRA contributions is contributing in a year when income is too high. If your income fluctuates or you have unexpected income in the year, you are particularly vulnerable. Watch out for the annual income limits. For 2023, the ability to make a Roth IRA contribution will begin to phase out when Modified Adjusted Gross Income (MAGI) reaches $138,000 if you are single and $218,000 if you are married filing jointly. For traditional IRAs, there are no income limits for eligibility to contribute, so this is never a problem.

4. Failed Rollovers

You may be surprised to know that a failed attempt to make a rollover can result in an excess contribution. How can this happen? Well, there are a variety of ways you can end up in this position. One possibility would be the violation of one of the rollover rules. If you mistakenly attempt a rollover after the 60-day rollover period has already expired or if you violate the once-per year rollover rule, you will end up with an excess contribution instead of a rollover in your IRA.

If you are older, you may be at greater risk of excess contribution 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 your RMD, you will end up with an excess contribution.

5. Inherited IRA Mistakes

If you inherit an IRA from someone who is not your spouse, you may not contribute to that inherited IRA or combine it with your own IRA. If you do, you will have an excess contribution.

Fixing Excess Contributions

Knowing what can cause excess IRA contributions is the first step in avoiding them. If despite your best efforts, an excess contribution occurs, the bad news is that the problem will not fix itself. An excess contribution will be subject to penalties each year it remains in the IRA. The good news is that excess contributions can be corrected and often without penalty. For the right fix for your situation, be sure to talk to a knowledgeable tax or financial advisor.

https://www.irahelp.com/slottreport/5-ways-excess-ira-contributions-happen

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

Oftentimes with these articles, I compare certain retirement account rules to arbitrary items. A creative metaphor or simile can help the reader grasp a concept. For instance, past entries have referenced revolving doors, hurricane preparedness, Bloody Mary cocktails, Charlie Brown’s Halloween costume, genies in lamps and even Indiana Jones. But I was struggling. No single comparison seemed to carry the weight necessary to create an entire Slott Report submission. So, here is a 6-pack of random summertime similes and other retirement account comparisons.

“Beer Dive.” I live in a wonderful community with a golf course, tennis courts, swimming pools, walking paths, parks and even a waterslide. During the Fourth of July holiday, a neighborhood parade kicks off several events at the main pool – food trucks, face painting for the kids, live DJ…and the annual Beer Dive! Roughly 20 cases of assorted cans of beer are dumped into the deep end. Some float, some sink and scatter across the bottom. Adults ring the pool, shoulder to shoulder. When the whistle blows, a chaotic scramble of thrashing water follows. Participants swarm and grab and stuff as many beers into their bathing suits as possible. (I think the record is 11.) Ah, capitalism! Also, you keep every beer you snap up. No one taxes potentially 35% of your haul. A Roth IRA beer dive!

“Pub Crawl.” My family and I do a pub crawl at the beach – visit a handful of locations and enjoy a beverage at each. The rotation includes a dive bar, tiki bar, fish shack, rooftop bar, burger joint and a restaurant on the pier. Diversification! We invest a little time at each locale and experience the different vibes. Some places are just opening, some are already buzzing with energy upon arrival. The fish shack bar is air-conditioned and poorly lit. The dive bar is blazing hot on the sand. The tiki bar takes only cash, but no shirts or shoes are required. By spreading our time across multiple providers, we ensure a full day of entertainment.

“Beach Umbrellas.” Two multi-color umbrellas shield us from the sun. How people can spend any time on the beach with no protection boggles the mind. To sit on a towel in the direct heat and risk getting burned seems unbearable. Thankfully, IRA accounts have two umbrellas – state-level creditor protection (for lawsuits), and $1,512,350 in bankruptcy protection (not including former plan dollars rolled into an IRA, which maintain 100% bankruptcy protection).

“Lost Child and a Lifeguard.” From the shade of my beach umbrellas, I saw a little boy – maybe 6 years old – searching for shells. As the tide ebbed, he used a yellow plastic sieve to screen sand and uncover treasure. Focused on his hunt, he drifted too far from his family and became lost. I did not know he was lost until he approached a man who immediately waved down a passing lifeguard in an ATV. From a distance I saw the man and lifeguard talk to the boy. He stared at the sand, nervous. When he looked up, he pointed back in the direction he came, and shrugged his shoulders. The lifeguard spoke into his radio, listened, and after a moment, smiled. The lifeguard shook hands with the man, put the boy in the passenger seat of the ATV, said “Hang on,” and looped back to reunite the little treasure hunter with his family.

Professional guidance. Many are blinded as they seek fortune via get-rich-quick schemes. Stray too far from your investment objectives, and a financial advisor can pull you from the riptide of an unsuitable investment and guide you back. Just hop on the ATV with the surfboard on top.

https://www.irahelp.com/slottreport/summertime-similes-metaphors-%E2%80%93-no-shirts-or-shoes-required

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

Question:

I believe we are all waiting for the IRS to issue rules related to distribution requirements (or not) for beneficiaries who are subject to the 10-year rule under the SECURE Act. Where is the clarification for 2023?  In my situation, my children are beneficiaries who inherited an IRA from Grandma, who passed away in 2022. She had started her required minimum distributions (RMDs). So, I know the accounts need to be emptied within 10 years, but there is no clarification on required RMDs in years 1-9 of the 10-year payout period.

When will the IRS update us with 2023 rules and/or another waiver?

Answer:

Your situation is unfortunately very common. There are many IRA beneficiaries who are subject to the 10-year rule and have the same confusion as to what to do for this year in the wake of the IRS issuing proposed regulations in 2022 requiring RMDs in years 1-9 of the 10-year rule.

As of right now, we have not gotten any further guidance from the IRS on this issue. You may be able to wait a little longer since there is still time left in the year but at some point, you will need to decide whether the RMDs for 2023 should be distributed. Currently we have proposed regulations from the IRS requiring RMDs to be taken during the 10-year period. In the absence of final regulations, which could be a long time coming, the safest approach is to follow the proposed regulations and take the annual RMDs.

Question:

I have a unique situation as follows:

A son, age 64, is tragically killed in a traffic accident. The beneficiaries of his IRA are his parents who are ages 92 and 90 respectively. It is my understanding that the parents will qualify as eligible designated beneficiaries (EDBs). The decedent has 3 brothers whose ages are within 10 years.

If the surviving brothers (siblings) are named as the beneficiaries of this IRA by the parents, do they qualify as EDBs if they would inherit this beneficiary IRA from the parents in the future?

Thanks so much for your assistance.

Dan

Answer:

Hi Dan,

Sorry to hear about this sad situation. This is a complicated question!

The parents would qualify as eligible designated beneficiaries (EDBs) and would be able to stretch payments over their own life expectancies (assuming the IRA is split into separate accounts). However, given their advanced ages, those payout periods would be shorter than 10 years. Because the IRA owner died prior to beginning RMDs, the 10-year rule would be another option. That would likely be a better choice since no annual RMDs would be required during that period.

If the siblings are named as successor beneficiaries on these accounts, they cannot qualify as EDBs. Instead, they will be subject to the 10-year rule. Here is where things get really tricky. If the parents chose the stretch option, those payments must normally continue during the full 10-year period. But in this case payments would likely run out in less than the full 10 years due to the advanced age of the parents. On the other hand, if the 10-year rule was selected by the parents, then the successor beneficiaries would only get whatever remains of the original 10-year period.

https://www.irahelp.com/slottreport/10-year-rule-and-eligible-designated-beneficiaries-todays-slott-report-mailbag

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

In her June 28, 2023 Slott Report post, Sarah Brenner discussed several reasons why it pays to roll over your retirement plan savings to an IRA. Another option is to keep your funds in the plan. Keep in mind, though, this may not always be possible. Sometimes your plan may force you to take your dollars out, for example when you reach the plan’s retirement age (normally, age 65) or if you have a small account balance. And, of course, if you keep your dollars in the plan when you leave employment, you’ll have to start taking required distributions when you reach your RMD (required minimum distribution) age.

With that in mind, here’s several reasons why you may want to keep your plan funds where they are:

Creditor Protection

One of the most important reasons is protecting them from creditors. Assuming you’re in an ERISA plan, your funds are rock-solid safe if you are in bankruptcy or if you are sued. (ERISA plans include most 401(k) plans, some 403(b) plans, but no 457(b) plans. Ask the plan administrator if you’re not sure of your plan’s status.)  However, IRAs are not covered by ERISA, so once you do a rollover the rules are different. Although your rolled-over dollars are still protected if you declare bankruptcy, they may not be safe against other creditors. That depends on the law of the state where you live. The protection of IRAs under state laws varies from state to state.

Loans

Most plans allow you to borrow against your account, but you can’t take a loan against your IRA. Although not common these days, some plans also allow you to purchase life insurance with your plan funds. You can’t buy insurance with your IRA.

Still-Working Exception

If you’re still working at age 73, you can usually delay RMDs until you retire. (This doesn’t apply if you owe more than 5% of the company sponsoring the plan.) You have no similar ability to defer RMDs from your IRAs.

Age 55 or Age 50/25-Year Exception

There’s an exception to the 10% early distribution penalty if you receive a distribution from your plan after separating from service in the year you turn age 55 or older. (For public safety employees, the exception is age 50 or older – or the completion of 25 years of service, if earlier.) This age exception doesn’t apply to IRA withdrawals. So, if you separate from service when you’re 55 or older (or satisfy the age 50/25 years of service rule if a public safety worker) and will need to tap into your savings before 59 ½, you’d be wise to keep your funds in the plan. That way, you can avoid the penalty. By contrast, if you do an IRA rollover and then need to reach those monies before 59 ½, you’d be penalized.

https://www.irahelp.com/slottreport/why-you-should-not-roll-over-your-company-funds-ira

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

Question:

Ed Slott and Team,

I am 73 and a retired financial planner. I would like to do a partial withdrawal from my 403(b) and do a 60-day rollover back into the same 403(b). Can I do this, or do I have to do the 60-day rollover to a different 403(b) or IRA?

Please let me know at your earliest convenience.

Thank you,

Robert

Answer:

Hi Robert,

There is nothing in the tax rules that would prevent a distribution from a 403(b) from being rolled back to the same 403(b). However, there are a couple of potential hurdles here. The 403(b) must be willing to accept the rollover. Also, if you must take a required minimum distribution (RMD) from the 403(b), the RMD amount is not eligible for rollover.

Question:

My husband retired 20 years ago and we have been using IRS Uniform Lifetime Table to withdraw his RMDs. The IRA custodian has changed the factor used to calculate his RMD based on the new table. They told us that everyone must use the new table.  I thought we were supposed to stick with the table we’ve been using for 20 years.  Am I wrong?

Thank you.

Peg

Answer:

Hi Peg,

The IRS released new life expectancy tables to be used beginning for 2022 required minimum distributions (RMDs) from retirement accounts. All retirement account owners and beneficiaries must switch to the new tables to calculate their RMDs, even those like your husband who have been taking RMDs for years based on the old tables. This is a good thing for most people because the new tables account for longer life expectancy and will result in slightly smaller RMDs. Of course, as has always been the case, an IRA owner can take more than their RMD. So, if you husband want to take larger amounts from his account, he can do so.

https://www.irahelp.com/slottreport/60-day-rollovers-and-required-minimum-distributions-todays-slott-report-mailbag-0

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

If you are like most American workers, you will change jobs many times during your lifetime. With a job change, you will have a decision to make. What should you do with the funds in your retirement plan? One option is to do a rollover to an IRA. An IRA rollover offers some big benefits.

Grow Your Retirement Savings

When you contributed to your employer’s plan, you made the smart decision to save for retirement. Rolling those funds over to an IRA will allow you to preserve those dollars for your retirement and even add to them in the future. You could keep your funds in an IRA and make IRA contributions or you could move the funds over to a future employer’s plan. Either way your retirement savings will remain intact and potentially grow.

No Tax Hit

It may be tempting to hold on to any funds distributed to you from your employer plan. If you do, there will likely be a tax bill. Most retirement plan funds are taxable when distributed. Even worse, if you are under age 59 ½ you may be hit with a 10% early distribution penalty, unless an exception applies. (The penalty doesn’t apply if you take out your funds following separation from service in the year you turn 55 or older, or 50 or older if a public safety employee.)

Investment Options

Changing jobs can be stressful and overwhelming. It may be tempting to just ignore your retirement savings and leave them in your former employer’s plan.  By taking this path of least resistance, you may be missing out. Your employer plan may offer some solid investment choices. However. by rolling over to an IRA you can take advantage of many more. The choices for IRA investments are almost limitless and you should be able to find some that most closely suit your needs.

How to Roll Over to an IRA

Rolling over to an IRA can offer many advantages, but everyone’s situation is different. Think carefully and weigh your options. If you do decide a rollover is for you, consider doing a direct rollover to an IRA instead of 60-day rollover. With a direct rollover your retirement funds can go right to your IRA. You avoid concerns about missing the 60-day deadline and you can skip any withholding requirements.

Don’t hesitate to consult a knowledgeable financial or tax advisor if you have questions. Your retirements savings are on the line. If you decide an IRA rollover is the right move for you, you will want to be sure the transaction is done properly.

https://www.irahelp.com/slottreport/why-you-should-roll-over-your-retirement-funds-ira

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

When an IRA owner dies, we look to the beneficiary form to determine who should receive the IRA funds. After death, there is a transition process as assets are moved into an inherited IRA for the beneficiary. But what if the beneficiary dies after the death of the original IRA owner, but prior to claiming the account? After all, it can be well over a year before any action needs to be taken by the beneficiary. A lot could happen in that time. Are the IRA dollars now suddenly in limbo with no owner? Are there any protocols or rules to follow in such a scenario?

In fact, determining how the IRA is to be distributed when the beneficiary dies before claiming the account is clear. The assets do NOT go to the contingent beneficiary. If the original IRA owner named contingent beneficiaries on the beneficiary form, those names are null and void if the primary beneficiary is still alive when the owner dies. Assuming the primary beneficiary does not disclaim any portion of the IRA, the names on the contingent line become meaningless. The moment an IRA owner dies, the primary beneficiary is immediately deemed to be the new owner of those assets.

During a normal transition period, the beneficiary determines what options she has. Is she a spouse who can do a spousal rollover into her own IRA? Does she want to take a lump sum distribution? Is she eligible to stretch required minimum distribution (RMD) payments? Does the 10-year rule apply? Additionally, if the beneficiary is establishing her inherited IRA, she will name her own beneficiaries (successor beneficiaries) on a fresh beneficiary form.

However, if this first beneficiary dies prior to claiming the inherited dollars – and prior to naming a successor beneficiary – there are definitive “next steps” to follow:

• The moment the original IRA owner dies, the beneficiary owns the IRA assets.
• If that beneficiary does not claim the account (i.e., complete any paperwork to officially accept/transition the dollars) and subsequently dies, the account is deemed to be an inherited IRA with no named beneficiary.
• Since there is no named beneficiary, we look to the default beneficiary as determined by the custodial document. Oftentimes this is the estate.
• Technically, the estate is a successor beneficiary in such cases.
• As a successor, the estate would be bound by the 10-year rule. This would either be a fresh 10 years or the remainder of the first beneficiary’s 10-year period (depending on the type of beneficiary who first inherited the account).

Example: John, age 75, has a traditional IRA. He dies with his sister Kathy as his primary beneficiary and Kathy’s children (John’s nephews) named as contingents. Kathy, age 72, qualifies as an eligible designated beneficiary (EDB) because she is not more than 10 years younger than John. Eight months later, before completing any paperwork to claim the account, Kathy dies. The assets do NOT pay to the contingent nephews. Kathy, as an EDB, is deemed to have created an inherited stretch IRA. The custodial document identifies her estate as default beneficiary. An estate-owned inherited IRA is established. Since Kathy was an EDB and allowed to stretch RMD payments, the estate, as successor, receives a fresh 10-year rule. RMDs are due in years 1 – 9 based on Kathy’s single life expectancy, and the estate-owned account must be emptied by the end of year 10.

https://www.irahelp.com/slottreport/death-ira-beneficiary-%E2%80%93-claiming-account

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

Question:

Hello,

I am involved with a traditional non-spouse inherited IRA that was passed from my mother to myself and two siblings in 2022. My mother was 84 when she passed and was taking RMDs.

I understand the new legislation passed under the SECURE Act requires any such traditional inherited IRA requires full distribution by the end of the 10-year period following her death.  I fully understand the law change.

My question revolves around potential yearly RMDs for each of us starting in 2023. Are RMDs for inherited IRAs now required by IRS regulation starting in 2023?  If so, under what table is the RMD calculated (by applying the factor to the 12/31/2022 balance)?

The Treasury issued PROPOSED regulations in 2022 indicating that RMDs for inherited IRAs would be required.  My understanding is the proposed regulations were met with significant protest by tax professionals and practitioners. However, my understanding is that PROPOSED regulations are not binding until finalized by the Treasury Dept. I have not seen any document or commentary indicating that the applicable regulations have ever been finalized. Are RMDs required for inherited IRAs in 2023 until the Treasury Dept. finalizes the regulations?

Thank you.

Mike

Answer:

Hi Mike,

We believe that annual RMDs are required for 2023. As you noted, the IRS issued proposed regulations in February 2022 requiring that beneficiaries subject to the 10-year payout rule also take annual RMDs in years 1-9 of the 10-year period. That annual RMD requirement applies only if the IRA owner died or after his RMD required beginning date. While those proposed regulations have not yet been finalized, the prudent course would be to follow the proposed regulations until the IRS finalizes the rules – which could take some time. Since your mother died after her required beginning date, you and your siblings must take the first annual RMD by 12/31/23. If the IRA has already been split into separate inherited accounts, or will be split by 12/31/23, you and your siblings would each use your respective life expectancy factor under the IRS Single Life Expectancy Table for 2023. For subsequent years, you and your siblings would subtract one from the prior year’s factor.

Question:

My age is currently 69, and several years ago I converted funds in a regular 401(k) account to a Roth 401(k) account.  My questions are whether the 5-year rule applies to this conversion and at what age does my RMD kick in for the amount in my regular 401(k)?

Thanks for your help

Answer:

The 5-year rule for Roth 401(k) accounts determines whether a distribution of earnings is tax-free. Once the 5-year period is satisfied, earnings can come out tax-free, as long as distribution occurs after age 59 ½ (or after death or disability). The 5-year period begins on January 1 of the year you made your first conversion (or Roth employee contribution) to that particular plan. If your initial conversion or Roth 401(k) contribution was done in 2018 or earlier, your Roth plan earnings are now tax-free.

Are you still working? Unless you own more than 5% of the company sponsoring the plan, you can delay RMDs on your non-Roth 401(k) funds until the April 1 following your retirement. If you do own more than 5%, or if you have already retired, RMDs begin in the year you reach age 73. However, the first RMD can be delayed until the following April 1. (Note: Starting in 2024, RMDs on Roth 401(k) accounts are not required.)

https://www.irahelp.com/slottreport/inherited-ira-rmd-requirements-and-roth-401k-rules-today%E2%80%99s-slott-report-mailbag

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

Some of you are aware that there are two types of section 457(b) retirement plans – governmental plans for state and local municipal workers, and “top hat” plans for highly-paid and managerial employees of tax-exempt employers like hospitals. What you may not know is that the two types of plans are different in several important ways.

One of the major differences has to do with rollovers. Top hat participants are often surprised to learn that, when leaving their employer, they cannot do a tax-free rollover of their account to an IRA or another employer plan. (They can do a tax-free transfer if they take a new job with an employer that has a top-hat plan and if both the old plan and the new plan allow transfers.) This means top hat distributions are normally taxed in the year of distribution. To reduce this tax hit, some plans allow for distributions to be made in installments over several years. By contrast, municipal workers can do a rollover of their 457(b) distribution to an IRA or another plan that accepts rollovers – just like 401(k) participants.

A second major difference is the level of protection participants in the two types of plans have if the entity sponsoring the plan goes into bankruptcy. Governmental 457(b) plan funds, like 401(k) dollars, must be held separately in a trust fund, meaning those funds can’t be touched by the municipality’s creditors. On the other hand, top hat plan funds must remain the property of the company. So, if the business goes bankrupt, participant accounts can be reached by creditors.

As a way of mitigating this risk, some employers with top hat plans offer “rabbi trusts” (named for the kind of trust first offered by a congregation to its rabbi). With a rabbi trust, top hat plan funds still remain subject to the employer’s creditors. However, the employee is protected if the company refuses to pay the promised benefits due to a change of heart or because another entity becomes the employer after a corporate transaction.

The fact that top hat accounts can be seized by creditors explains another difference between the two types of plans. Top hat plans can only be offered to employees who are key management or are highly paid. In a hospital setting, this typically means doctors and high-level executives. Congress mandated this limited eligibility under the belief that only highly-paid employees should bear the risk of losing their money to creditors. By contrast, governmental 457(b) plans can cover all employees, including rank-and-file workers.

Several plan features permitted in governmental plans aren’t allowed in top hat plans. These include Roth contributions, plan loans and non-hardship in-service withdrawals after age 59 ½.

If you are a participant in a 457(b) retirement plan, it is imperative to understand what type of 457 it is, and what benefits or limitations apply.

https://www.irahelp.com/slottreport/two-types-457b-plans

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

June is Pride Month. While celebrating, same-sex couples may want to take this opportunity to consider plans for their retirement accounts. Since the SECURE Act and SECURE 2.0 have overhauled the rules, it may be time for a new strategy. Here are 5 retirement account planning tips for same-sex couples.

1. Marriage Has Its Benefits. If you are not working, you may think you are ineligible to make an IRA contribution. That might not be the case.  If you are married, you may be able to contribute to your IRA based on your spouse’s taxable compensation for the year. An individual could make spousal IRA contributions in some years and regular IRA contributions in others.

To make a spousal contribution for 2023, you must be legally married on December 31, 2023, and file a joint federal income tax return for 2023. For same-sex couples, this would not include civil unions. If you are divorced or legally separated as of that date, neither is eligible for a spousal contribution, even if they were married earlier in the year.

When you reach age 73, you must start taking annual distributions, called required minimum distributions (RMDs). These are calculated by using life expectancy tables provided by the IRS. IRA spouse beneficiaries who are more than ten years younger than the IRA owner may use the Joint Life Expectancy Table. This results in smaller RMDs versus using the Uniform Lifetime Table, which is required to be used to calculate lifetime RMDs for all other IRA owners.

2. Spouse Beneficiaries Get Special Breaks. Only a spouse beneficiary can roll over or transfer an inherited IRA from her deceased spouse into her own IRA. This is known as a spousal rollover. There is no deadline for a spousal rollover. Once the spousal rollover is done, the funds are treated like any other IRA funds you own. There are no RMDs if you are not yet age 73. Non-spouse beneficiaries do not have this rollover option.

Not every spouse beneficiary will want to do a spousal rollover. Sometimes, to avoid early distribution penalties, it can make more sense to keep an inherited IRA. Under the SECURE Act, most beneficiaries will need to empty an inherited IRA by December 31 of the tenth year following the year of death. However, eligible designated beneficiaries (EDBs) will still be able to take RMDs from the inherited IRA based on their own life expectancy. A spouse is one of those EDBs.

As a spouse beneficiary you can take advantage of a special rule unavailable to non-spouse beneficiaries. If you are the sole beneficiary, and if your spouse dies before their required beginning date, you can delay RMDs from the inherited IRA until the year your spouse would have attained age 73. That can mean a delay of many years before RMDs from the inherited IRA must begin.

Even when spouse beneficiaries are subject to RMDs, they receive a special break when calculating that amount. Spouse beneficiaries have the advantage of being able to recalculate their life expectancy. Over time, this results in lower RMDs for spouse EDBs compared to non-spouse EDBs.

3. Still Stretching Inherited IRAs. Not all same-sex couples are married. Many have not tied the knot. Those in civil unions will not be considered married under federal tax law. Leaving a retirement account to a partner who is not a spouse means they will be treated like any other non-spouse beneficiary.

Under the SECURE Act, most non-spouse beneficiaries will be subject to the 10-year payout rule. However, there is a special exception for EDBs, who are still able to stretch payments from an inherited IRA over their own single life expectancy. One category of EDBs is “beneficiaries who are not more than 10 years younger than the retirement account owner.” If same-sex partners are close in age, they can leverage this rule to access the stretch for inherited retirement accounts.

4. Watch Out for State Law. While same-sex couples are considered legally married under federal law, state laws can pose some challenges when it comes to retirement account planning. For example, under the SECURE Act, a minor beneficiary of an account owner can still stretch distributions from a retirement account until age 21. This rule is strictly limited to children of the account owner, so this could pose problems if a child is not either biological or legally adopted by the deceased account owner. Same-sex couples may face more issues with these requirements.

5. Good Advice is Essential. In the wake of the Supreme Court’s decisions over the past decade, millions of same-sex couples headed to the alter. Many of these newlyweds, never expecting to see a day when they would be allowed to marry, may not have paid much attention to the special breaks that married couples receive under the tax code when it comes to retirement accounts.

Same-sex couples that have not married also may be seeking more information as to how the complex rules, both federal and state, work for their accounts. Good advice is essential. To find a knowledgeable financial advisor, please visit https://www.irahelp.com/find-an-advisor

https://www.irahelp.com/slottreport/pride-month-5-retirement-account-planning-tips-same-sex-couples

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

Question:

I have a large amount of stock from a previous employer in my 401(k).  I had been reinvesting the dividends for the last 23 years since I left the company.  I no longer want to reinvest the dividend to buy additional shares.  Most of the stock has appreciated considerably since I bought it.

I am still working for another year and in a fairly high tax bracket.  After I retire, I plan to take the stock out of the 401(k) to use the net unrealized appreciation strategy (NUA) to get favorable tax treatment on the appreciate stock.  The 401(k) has two options for dividends from the company stock while it is still in the 401(k) plan: I can either reinvest the dividend in more company stock, or have them send me a quarterly check for the dividend amount. Will I jeopardize the favorable tax treatment if I have them send me a quarterly dividend check in years before I proceed with the NUA distribution?

Answer:

If you only take the dividends from the company stock, that will not eliminate your opportunity to still leverage the NUA tax strategy in the future. While many plan transactions (like a normal distribution, in-plan conversions or even a required minimum distributions) will “activate” an NUA trigger and force you to complete the process in that same calendar year, taking only the dividends from the company stock will not jeopardize a future NUA transaction.

Question:

A client sent me this about his IRA funded with silver coins: “About 3 months ago the depository I was using went into receivership due to illegal practices. Their emails indicated I could get back a portion of my investment, so I had the coins shipped to my house. This week, I received all the coins at my home, nothing was lost in the process. I don’t really want to send it all to another depository, but I know there is a tax penalty involved. Could I put the equivalent amount of cash into my IRA and keep the silver coins and avoid the tax penalty?”

Thanks for your help,

Bob

Answer:

Bob,

No, your client cannot replace the silver coins with cash. Taking out coins and trying to roll over cash violates the same-property rule. If an IRA owner takes out coins, he must roll over coins. If he takes out cash, he must roll over cash. If he takes out stock, he must roll over stock. In this situation, we have a taxable distribution of coins to the IRA owner. If he is under 59 ½ and no exception applies, the 10% penalty is also a possibility. To avoid taxes and the penalty, the actual coins must be rolled over within 60 days to another custodian who will accept such a rollover.

https://www.irahelp.com/slottreport/nua-and-silver-your-ira-todays-slott-report-mailbag

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

A couple of years ago I was asked what the tax consequences are when a Roth IRA is split in divorce. After a pause, I answered honestly: “I have no idea…but will find out.” In fact, there is no specific guidance in the Tax Code or in the regulations on how to handle such a transaction. So, the Ed Slott team embarked on a full research effort culminating in a lengthy write-up, presentation and even an Ed Slott IRA Advisor Newsletter article. We included multiple examples in our final report, complex hypothetical scenarios and the rationale supporting our conclusions. Ultimately, we delivered this material to our Elite Advisor members at a subsequent conference.

Today’s Slott Report entry is not about the details of transferring a Roth IRA via divorce. However, so no reader is left shortchanged, a summary of some of our conclusions is here:

• For a partial split via divorce, contributions, converted dollars and earnings are transferred pro-rata. (An ex-spouse cannot just deliver the earnings, for example.)
• The existing Roth IRA can be retitled, or the assets can be moved via direct transfer to the receiving ex-spouse’s account.
• The receiving ex-spouse can choose which 5-year start clock (what we refer to as the “5-year forever clock”) is more beneficial.
• Existing 5-year conversion clocks transfer to the receiving spouse.

Some of our best educational material comes from real-life inquiries. After years of conversations and phone calls and thousands of interactions, we still receive questions and encounter fresh situations. Occasionally, there is no direct guidance on how to handle some of these scenarios. In such cases, we use our best judgement. In the presence of little to no guidance, we ask ourselves, “If the IRS were to ask questions, can these actions be justified?”

In fact, another unusual question presented itself just recently. Ironically, it was also predicated on a divorce: “My client owns a stretch IRA that he inherited from his father in 2018, which is before the SECURE Act. He was stretching RMD payments over his own single life expectancy. He recently divorced and the court awarded the entire inherited IRA to his ex-wife. Do we change the single life expectancy factor to her age, or leave it the same?”

I sat for a moment, thinking. I told the advisor I wanted to kick his question around with the Ed Slott team. “Give me a few minutes. I will get a consensus and call you right back.”

This is one of those situations where there is no direct guidance. How do we proceed in a justifiable manner that can easily be defended should the IRS ask questions? What is a reasonable path forward? Our conclusion was this: It is our opinion that the inherited IRA should continue using the original beneficiary’s single life expectancy (the son’s). Since that is the factor currently in place, and since that was the proper factor when the account was inherited, it should remain as-is. This seems like a sensible a justifiable solution.

If you find yourself in a unique situation where guidance is limited, first, exhaust all avenues to determine the best course of action. Document your process, and keep one question in mind: “If the IRS asks questions, can my actions be justified?”

https://www.irahelp.com/slottreport/if-irs-ask-questions-can-your-actions-be-justified

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

Although the U.S. divorce rate is in a steady decline, it’s still one of the highest in the world. And with divorces often come QDROs – “qualified domestic relations orders.” A QDRO is a state court order obtained by divorcing couples that requires a company plan to pay a portion of the benefit of the spouse participating in the plan to the other spouse.

Here are answers to five common questions about QDROs:

1. Are QDROs necessary for IRAs?

No. QDROs are only required when divorcing couples split funds in an ERISA plan, and IRAs are not covered by ERISA. IRAs can be split via a divorce decree or property settlement agreement.

2. How much of a participant’s benefit is paid to the other spouse through a QDRO?

There is no set amount. Instead, the divorcing couple negotiates how much the non-participant spouse will receive. For a 401(k) plan, a typical QDRO will award the non-participant spouse 50% of the participant’s account balance as of the date of divorce. QDROs for pension plans are more complicated. A typical QDRO will award the other spouse 50% of the “marital portion” of the participant’s benefit. The marital portion is normally the number of years the participant was in the plan while married, divided by the total number of years the participant was in the plan (married or not).

3. Who pays taxes on QDRO payments?

The non-participant spouse pays taxes on QDRO payments. But the non-participant spouse can roll over certain QDRO payments to an IRA– just as if she were a plan participant. And, even if the non-participant spouse is under age 59 ½, QDRO distributions are not subject to the 10% early distribution penalty.

4. What is an “in-marriage QDRO,” and do they work?

For several years, some attorneys and advisors have been pitching “in-marriage QDROs” that allow for the tax-free transfer of assets between a couple’s retirement plans while the couple is still married. However, be careful about this strategy because we’re not sure that it’s legal. The Department of Labor (which has jurisdiction over QDROs) has never endorsed in-marriage QDROs and, in fact, has suggested that they don’t work. See DOL Advisory Opinion 90-46A.

5. Where can I get more information?

QDROs – especially pension plan QDROs – can be very complicated. If you are in the process of divorcing, make sure your lawyer understands the QDRO rules. If you are an advisor, make sure your client gets adequate legal (and, if necessary, actuarial) help. The Department of Labor has published the following helpful guidebook: QDROs The Division of Retirement Benefits Through Qualified Domestic Relations Orders 2020 (dol.gov)

https://www.irahelp.com/slottreport/five-qdro-qas-0

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

Question:

I inherited an IRA from my brother back in 2019. I have been taking required distributions from it each year. Can I do a qualified charitable distribution from this inherited IRA this year to satisfy the required distribution requirements from this IRA?

Answer:

It is possible for a beneficiary to do a qualified charitable distribution (QCD) from an inherited IRA. You must be age 70 ½ and the maximum amount that can be taken for 2023 is $100,000. A QCD can satisfy a required minimum distribution from an inherited IRA.

Question:

I have a client who is interested in having his IRA purchase a vacation home. Can this be done?

Answer:

An IRA can invest in real estate. It is an allowable investment. However, your client should be aware that that there are prohibited transaction concerns with using his IRA to invest in a vacation property. The prohibited transaction rules do not allow you to personally benefit from investments in your IRA. That would mean that your client (or his family) could never use his vacation home. He also could not do any work on the home, such as repair work, without violating the rules.

Investing an IRA in alternative investment such as real estate, while allowed, comes with additional risks and complications. Your client should understand these factors before deciding to move forward.

https://www.irahelp.com/slottreport/inherited-iras-and-real-estate-iras-todays-slott-report-mailbag

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

Probably the biggest advantage that a spouse beneficiary of an IRA has over other beneficiaries is the ability to do a spousal rollover. Only a spouse beneficiary can do a spousal rollover. Nonspouse beneficiaries do not have this option. With a spousal rollover, inherited retirement account funds become the spouse beneficiary’s own.

How a Spousal Rollover Is Done

A spousal rollover can be done by rollover, direct transfer or by the spouse beneficiary treating the inherited IRA account as her own. All three of these methods will achieve the same end result of a spousal rollover.

A direct transfer of the inherited assets is the safest way to get a spousal rollover done. It avoids the rules and potential pitfalls that come with a 60-day rollover. If the deceased spouse died on or after his required beginning date (RBD), the year-of-death RMD must be taken before a 60-day (spousal) rollover is permitted. But, an RMD can be directly transferred to another inherited IRA and taken later in the year.

Example: Jake, age 75, dies in 2023 without taking his RMD. His spouse, Gwen, age 68, is his beneficiary. Gwen decides to do a spousal rollover and she transfers the inherited IRA to a new IRA in her own name. She can transfer Jake’s entire IRA, including the year-of-death RMD, to the new IRA and take the year-of-death RMD later in the year. In 2024, Gwen will not need to take an RMD from the new IRA because it is considered her own IRA and she is not yet 73.

When a spouse beneficiary treats an inherited account as her own, the surviving spouse essentially pretends as if she owned the deceased spouse’s IRA account all along. This method of doing a spousal rollover is relatively uncommon as many custodians do not allow this option.

Consider a Spousal Rollover Carefully

While a spousal rollover is a powerful strategy, it should be considered carefully. This election is irrevocable. Once the funds are in spouse’s own IRA, a 10% early distribution penalty will apply if the spouse is under age 59 ½ when distributions are taken. There is no going back to an inherited IRA.

A young spouse beneficiary should consider whether he will need the funds in the inherited IRA. If so, leaving the account as an inherited IRA may be the better choice. There is no deadline for a spousal rollover, so there is nothing that prevents it from being done later on when the spouse beneficiary reaches age 59 ½.

These rules can be confusing, and mistakes can be expensive. Spouse beneficiaries with questions about the right move should speak with a tax advisor who is knowledgeable about these rules.

https://www.irahelp.com/slottreport/spousal-rollovers

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

For deaths in 2020 or later, we know that a non-eligible designated beneficiary (NEDB) of an IRA is subject to the 10-year rule. Meaning, the account must be emptied by the end of the tenth year after the year of death. In its proposed SECURE Act regulations, the IRS takes the position that when death occurs on or after the required beginning date (RBD – generally April 1 of the year after a person turns 73), an NEDB must also take annual required minimum distributions (RMDs) in years 1 – 9 of the 10-year period.

I like to say that if RMDs have been turned on, they cannot be turned off. If the original IRA owner died before the RBD – he was not yet taking lifetime RMDs – then there are no RMDs in years 1 – 9 for the NEDB. Why? RMDs were never “turned on.” However, if that same IRA owner died on or after his RBD, that same NEDB would have RMDs in years 1 – 9 of the 10-year period because RMDs had been turned on. (Whatever is left in the account at the end of year 10 is considered the total final RMD.)

This requirement of annual RMDs when an account owner dies on or after the RBD stems from a rule sometimes called the “at least as rapidly” (ALAR) rule. While the ALAR rule does not require the same amount that was taken by the IRA owner to also be taken by the beneficiary, it does require that the process of taking RMDs continue. This is a key point. ALAR is not a function of amount, it is a function of frequency.

Example: Abe, age 80, dies in 2022. The beneficiary of his traditional IRA is his daughter Martha. Martha is an NEDB and will have to take annual RMDs from the inherited IRA for years 2023 – 2031 (years 1-9 of the 10-year period). Also, the entire remaining inherited IRA balance must be distributed by December 31, 2032. Martha will use her own single life expectancy to calculate her initial RMD factor. She is 56 in 2023. The corresponding factor is 30.6. Martha will subtract 1 from this factor in each successive year.

Application of the ALAR rule within the 10-year period has been controversial, and it is possible (but unlikely) that the IRS will change its mind in the final regulations. While the law bounces a reader from legal section to section, the IRS does seem to have justification in the tax code for requiring annual RMDs in this situation. In reference to ALAR, I have been asked more than a few times “Where does the law say that?” Knowing that I am about to take a person on a guided journey through pages upon pages of legislation, my response is the same: “Buckle your seatbelt, because this is long and winding ride.”

Of course, the example above is clean and easy. Real life presents countless variables and numerous scenarios. How old was the IRA owner when he died? What was the RMD age then? Was this a traditional IRA or a Roth IRA? Is this a successor beneficiary situation? (Yes, if a beneficiary turned RMDs on, regardless of how old the original IRA owner was, ALAR dictates the successor cannot turn them off.)

As mentioned above – and worth repeating – ALAR is not a function of amount, it is a function of frequency. Overlay this on the 10-year rule, and one will ultimately land on the proper beneficiary payout structure.

https://www.irahelp.com/slottreport/alar-%E2%80%93-%E2%80%9C-least-rapidly%E2%80%9D-rule

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

Question:

If a 76-year-old is working full time and has a SIMPLE IRA and she does not own any of the company that sponsors the SIMPLE IRA, does she still have to take a RMD (required minimum distribution) from her SIMPLE IRA?

Answer:

Yes. SIMPLE IRA owners can’t use the “still-working exception” to delay RMDs until they retire. That exception is only available to certain employees in 401(k), 403(b) or 457(b) plans. Instead, SIMPLE IRA owners must start RMDs in the year they turn age 73.

Question:

Hello,

My understanding is that there is now a new rule for missed year-of-death RMDs. I believe that there is now an automatic waiver of the penalty if the year-of-death RMD is taken by the beneficiary’s tax filing deadline, including extensions.

If the beneficiary waits until the year after the year of death to take the deceased’s RMD, which tax year does that distribution fall into? I have inherited the IRA of my late aunt, who never took her 2022 RMD.  If I waited until 2023 to take this RMD, do I report it on my 2022 taxes or my 2023 taxes?  Is the bank going to issue me a 1099-R, and if so, which year will it be for?

Thank you,

David

Answer:

Hi David,

Your understanding of the new year-of-death RMD rules is correct. If the year-of-death RMD is missed, the beneficiary does have until his tax filing deadline, with extensions, to take the missed RMD. Additionally, the RMD is always taxed in the year it is actually distributed (2023, in your example). The custodian will issue a 1099-R for that year.

https://www.irahelp.com/slottreport/simple-ira-rmds-and-year-death-rmds-today%E2%80%99s-slott-report-mailbag

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

It looks like IRA owners will probably have to wait awhile to take advantage of a new program that allows them to self-correct IRA errors that previously couldn’t be fixed. In Notice 2023-43, the IRS said that self-correction for IRAs can’t be used until the IRS issues rules for the new program. And those rules aren’t required to be issued until the end of December 2024.

For a number of years, the IRS has had in effect a procedure – the Employee Plans Compliance Resolution Program (EPCRS) – that allows employers to fix certain tax code violations made by their retirement plans. The existing SECURE 2.0 legislation from last December loosened EPCRS to make self-correction for plans even more widely available. But employers have been in a bind because they didn’t know which rules to follow if they wanted to use EPCRS before the IRS publishes its new rules. Notice 2023-43 addresses this by giving interim guidance for companies to use during this transitional period.

SECURE 2.0 also expanded EPCRS to cover IRA errors for the first time. But since there’s no existing EPCRS rules for IRAs, Notice 2023-43 says the program won’t be available for IRAs until the IRS publishes guidance – which may not happen until December 2024.

Pending the expansion of EPCRS, IRA owners already have the ability to fix certain IRA mistakes. For example, since 2016 the IRS has permitted “self-certification” to remedy rollovers made after the 60-day deadline if the delay was on account of certain reasons. In addition, penalties for missed required minimum distributions (RMDs) and excess IRA contributions can be avoided if the IRA owner takes proper steps to fix the error.

With the extension of EPCRS, a wider list of IRA errors will eventually become available for self-correction. But it’s not clear just how wide this expansion will be. SECURE 2.0 says that IRA self-correction will allow “custodians to address” IRA errors. Does this mean that self-correction will be limited to mistakes made by custodians or will it also cover errors made by IRA owners or beneficiaries that can be fixed by custodians?

Whatever the case, the new self-correction program for IRAs probably won’t be effective anytime soon.

https://www.irahelp.com/slottreport/irs-delays-effective-date-ira-self-correction-program

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

Question:

In 2021, my wife inherited an IRA from her sister who was 4 years younger.  My wife therefore is an EDB (eligible designated beneficiary). Her sister was 66 years old at date of death. My wife has been taking RMDs based on her own age. What happens when my wife dies? Do all the following beneficiaries have 10 years to deplete the inherited IRA? Are there RMDs that need to be taken each year for those beneficiaries? If so, is the RMD based on the factor that my wife was using?

Thank you for your time and information.

Jeff

Answer:

Jeff,

Since this is an inherited IRA, after your wife’s death the next beneficiary will be a successor beneficiary. The rules dictate that if a successor inherits an account that was being stretched (which this one is), then the 10-year rule will apply to the successor, regardless of who the successor is. It does not matter if the successor is a spouse or disabled or could otherwise qualify as an EDB, the successor gets the 10-year rule. Also, RMDs will apply in years 1- 9 of the 10-year rule based on your wife’s single life expectancy. Essentially, the successor will “step into the shoes” of your wife, continue with the exact same single life expectancy factor (minus 1 each year), but will also have to deplete the account by the end of the 10th year after the year of your wife’s death.

Question:

Hello,

I am hoping you can answer a question for a client of ours. He is potentially being sued. Are SIMPLE IRAs protected from creditors? Any guidance would be appreciated.

Thank you!

Michelle

Answer:

Michelle,

SIMPLE IRA accounts do have some creditor (non-bankruptcy) protection. However, the level of protection is based on state law and will vary from state to state. Some states offer 100% creditor protection, but not all. If your client is potentially facing a lawsuit, he should seek legal counsel to confirm what creditor protections are available within his state.

https://www.irahelp.com/slottreport/inherited-iras-and-simple-ira-creditor-protection-todays-slott-report-mailbag

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

I got into some poison ivy and am suffering the consequences. It takes a few days for the welts to appear, but they are in full bloom. While I did take precautions before starting my yardwork (gloves, long sleeve shirt, etc.), in retrospect I could have been more careful. The frustrating part is, there isn’t a whole lot you can do once the swelling appears. Ice, some anti-itch spray, try not to scratch too much, and just methodically work through this incredibly uncomfortable irritation.

As I squirm and complain, I thought about what might qualify as poison-ivy equivalents for IRAs. What transactions or situations present themselves as non-life-threatening nuisances that must be dealt with? Here are 4 pain-in-the-tail IRA annoyances. Why four? Because 4 is an awkward and uncomfortable number for any list. (If I’m gonna suffer, we’re all gonna suffer.)

1. Having basis in an IRA. How does one get basis (after-tax dollars) in an IRA? You could make a non-deductible contribution. You could roll over after-tax dollars (non-Roth) from a work plan into the IRA. Regardless of how the after-tax money arrived, it must be acknowledged. The pro-rata rule dictates that a person cannot cherry pick only the basis in an IRA and subsequently withdraw or do a Roth conversion with just those after-tax dollars. Until the entire account is withdrawn or converted, the ratio of after-tax vs. pre-tax dollars in all of a person’s IRAs, SIMPLE IRAs and SEP accounts must be accounted for. Even if an IRA owner has the means to separate the basis from the IRA via a “reverse rollover” to a work plan – you cannot roll after-tax or Roth dollars from an IRA to a 401(k) – this transaction still requires effort and the risk that something could go wrong. Basis in an IRA – it’s a lingering and prickly pest.

2. Excess IRA contributions and subsequent fix. There is a myriad of reasons why an individual might contribute too much to an IRA. Maybe a person made a contribution, but then earned an unexpected bonus that pushed him over the income limits for a Roth. Maybe he rolled over dollars that were ineligible to be rolled over – like a required minimum distribution (RMD). Or maybe he just didn’t know the rules governing contribution limits. Nevertheless, the excess must be addressed. If the fix is made before the October 15 deadline, you must also consider the net income attributable (NIA). Or, you could recharacterize the contribution – along with the NIA. Corrections made after the October deadline come with a 6% penalty and the necessity to file IRS Form 5329. Nuisance, nuisance, nuisance.

3. Missed RMD. Similar to excess contributions, there are a million reasons why a person might fail to take an RMD. Regardless of why the oversight happened, the error must be attended to. Withdraw the RMD. Complete Form 5329. Explain to the IRS what happened. Beg for mercy, and hope the IRS applies some soothing calamine lotion to the 25% penalty.

4. Unexpected withholding on a 401(k) rollover. Your plan custodian withheld the required 20% on a distribution? Now your 60-day rollover is only 80% of what was anticipated? Well, if non-qualified dollars are available, you could “replace” the withheld funds, complete a full 100% rollover, and retrieve the “missing” 20% from the IRS next year when filing your return. If a direct rollover had been initially requested, you could have avoided this whole brambly mess.

Now excuse me while I scratch and burn and scowl and wish I had been more careful.

https://www.irahelp.com/slottreport/poison-ivy-ira-scenarios-avoid

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

The “once-per-year” rollover rule is one of those IRA rules that has serious tax consequences and cannot be fixed if violated. Breaking the rule results in a taxable distribution and a 10% early distribution penalty if you’re under age 59 ½. Plus, any rolled over funds are considered excess IRA contributions that are subject to a 6% annual penalty unless timely corrected.

The once-per-year rule applies to traditional IRA-to-traditional IRA rollovers and Roth IRA-to-Roth IRA rollovers. It doesn’t apply to company plan-to-IRA rollovers, IRA-to-company plan rollovers, or traditional IRA-to-Roth IRA rollovers (Roth conversions). One easy workaround to avoid the once-per-year rule is to do a direct transfer instead of a 60-day rollover.

The rule is often explained by saying that you can’t do more than one IRA-to-IRA (or Roth IRA-to-Roth IRA) rollover in any one-year (365-day) period. That’s an easy way of describing it, but it’s not always accurate. A better explanation is to say you can’t do a rollover of an IRA distribution made within one year of a prior distribution that you rolled over.

Here’s a few examples that explain the rule:

Example 1: Mattea received a traditional IRA distribution on June 1, 2022 that she rolled over to another traditional IRA on July 1, 2022. If Mattea receives a second traditional IRA (or Roth IRA) any time before June 1, 2023, the once-per-year rule prevents her from doing another 60-day rollover of that second distribution to another like IRA.

Example 2: Let’s say Mattea receives the second distribution on May 15, 2023 (within one year of the first distribution on June 1, 2022). She would still violate the once-per-year rule even if she delays rolling over the second distribution until July 2, 2023 (more than one year after the first rollover on July 1, 2022).

Example 3: Now assume that Mattea receives the second distribution on June 10, 2023 (more than one year after the first distribution on June 1, 2022). She would not violate the once-per-year rule even if she rolls over the second distribution on June 15, 2023 (within one year of the first rollover on July 1, 2022). This is an example of when doing two rollovers within a one-year period (on July 1, 2022 and June 15, 2023) is perfectly acceptable.

The bottom line is that, in applying the once-per-year rule, you look to the timing of distributions being rolled over – not the timing of the rollovers. The rule prevents you from doing more than one rollover of distributions made within a one-year period. It doesn’t necessarily prevent you from doing more than one rollover within a one-year period.

https://www.irahelp.com/slottreport/better-way-understanding-once-year-rollover-rule

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

Question:

Hello and thank you for all the great, helpful information you continue to send out.

I am due to take my first RMD (required minimum distribution) in 2024 which would make my required beginning date April 1, 2025 if I understand correctly. My intention is to empty my traditional IRA next year and convert it to my existing Roth. My question is, if my traditional IRA shows a zero balance by my required beginning date, would that still require a RMD be taken for 2024? I’d like to know if I can convert the entire account or if I have to take an RMD and then convert the rest. I think the answer is I would have to take an RMD, but am not 100% sure.

Thanks so much,

Dana

Answer:

Hi Dana,

Your thinking is correct. You must take an RMD for 2024 before you can convert. The rules say that the first money out of your IRA in a year for which you must take an RMD is considered your RMD. An RMD cannot be converted. This is true even for the first RMD year when a conversion is done before your required beginning date.

Question:

Do I need to take RMD from my Roth 401(k)?

Thanks!

Answer:

While you do not have to take RMDs during your lifetime from a Roth IRA, the rules have always required you to take RMDs from your Roth 401(k). This remains true for 2023. However, beginning in 2024, SECURE 2.0 does away with this requirement. Starting next year, you will not need to take RMDs during your lifetime from your Roth 401(k).

https://www.irahelp.com/slottreport/required-minimum-distributions-todays-slott-report-mailbag-1

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

You have likely heard of Health Savings Accounts (HSAs), and you may even understand the basics of how an HSA works. These accounts are really not too complicated. If you have a qualifying high deductible health plan, you may contribute to an HSA. Then, you can take tax-free distributions to pay for qualified medical expenses.

Beyond these basics, there are many advantages that an HSA can offer that many people are not aware of. Here is a list of the surprising benefits that you get with an HSA.

Qualified medical expenses include more than just doctor bills. Qualified medical expenses include those that would generally qualify for the medical expense deduction under the Tax Code. This means you can take a tax-free distribution from your HSA to pay not only medical expenses like doctor and hospital bills, but also medical supplies, prescription copayments, dental care, vision services, and even chiropractic expenses.

Your family can benefit too. You can take tax-free distributions from your HSA to pay for your spouse or child’s medical expenses, even if they are not covered by your high deductible health insurance plan.

Reimburse yourself years later. You can take a tax and penalty-free distribution from your HSA in 2023 to pay for medical expenses in a previous year, as long as the expenses were incurred after you established your HSA. That means you do not have to make an HSA withdrawal every time you have a medical expense. You can pay that expense out of your pocket and let your account grow, or decide to reimburse yourself in a later tax year.

HSAs can help even after contributions have stopped. Even if you no longer have a high deductible health plan and you are no longer contributing to your HSA, you can keep the HSA and continue to take tax-free distributions from it to pay for your qualified medical expenses for you, your spouse, and your dependents. However, you cannot contribute to an HSA once you are enrolled in Medicare. But you can keep your existing HSA and still take tax-free distributions for qualified medical expenses.

Gain new benefits in retirement. When you reach age 65, you also gain some new benefits with your HSA. Generally, insurance premiums are not considered qualified medical expenses. However, after age 65 and enrollment in Medicare, certain insurance premiums can be paid tax-free with HSA distributions. You can take tax-free distributions from your HSA to pay for Medicare premiums, excluding Medigap.

Benefits for your spouse. If your HSA beneficiary is your spouse, after your death, she can maintain the HSA in her own name and can continue to access the funds. Distributions for qualified medical expenses will be tax free just as they would have been to you.

https://www.irahelp.com/slottreport/hsa-benefits-may-surprise-you

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

QUESTION: Do required minimum distributions (RMDs) apply to inherited Roth IRAs?

ANSWER: It depends on who the beneficiary is.

Owners of traditional IRAs must start taking RMDs when they reach their required beginning date (RBD). That date is generally April 1 of the year after a person turns 73 (or 72 prior to SECURE 2.0, or 70 ½ prior to the original SECURE Act). However, owners of Roth IRAs are never required to take lifetime RMDs from their Roth IRA. Since lifetime RMDs are not applicable to Roth IRAs, all Roth IRA owners are deemed to have died before the RBD. Even if a Roth IRA owner died at age 100, he would be deemed to have died before his RBD.

Example 1: Jim is 75 years old. He has a Roth IRA. During his lifetime, Jim does not need to take RMDs from this account. Even if Jim lives for another three decades, his Roth IRA can remain totally untouched and will grow tax-free.

Now layer on the different beneficiary payout rules. As dictated by the SECURE Act, non-eligible designated beneficiaries (NEDBs) must abide by the 10-year payout rule. The entire inherited IRA account must be depleted by the end of the tenth year after the year of death. Additionally, if the original IRA owner died on or after his RBD (meaning he was taking lifetime RMDs), then RMDs would also apply to the beneficiary in years 1 – 9 of the 10-year rule. However, if the original IRA owner died before the RBD, the NEDB would not be required to take RMDs within the 10-year payout period.

As mentioned above, Roth IRA owners are always deemed to have died before the RBD, regardless of age, because Roth IRAs have no lifetime RMDs. As such, RMDs do not apply to the 10-year payout rule when a Roth IRA is inherited by an 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. After all, the inherited Roth IRA cannot remain untouched in perpetuity. 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.

Example 2: Jim from the example above dies at age 77. He named his brother Jack, age 69, and his granddaughter Lucy, age 40, as his 50/50 Roth IRA beneficiaries. Jack qualifies as an EDB because he is not more than 10 years younger than Jim. EDB Jack elects the lifetime stretch on his portion of the inherited Roth IRA and takes annual RMDs over the next 19 years. Lucy is an NEDB and is bound by the 10-year rule. NEDB Lucy has no RMDs in years 1 – 9, but must empty the inherited Roth IRA by the end of year 10.

https://www.irahelp.com/slottreport/inherited-roth-ira-rmds-or-no

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

Question:

Hello,

Are you required to take out RMDs (required minimum distributions) on an inherited Roth IRA? The original owner was 82 when he passed away. The funds were left to his nephew, so I understand the 10-year rule will apply.

Thanks for your help,

David

Answer:

Hi David,

You are correct that the IRA owner’s nephew is subject to the 10-year payment rule. The IRS says that beneficiaries subject to the 10-year rule also must take annual RMDs in years 1-9 of the 10-year period if the original owner died on or after his required beginning date (RBD) for RMDs. Roth IRA owners are always considered to have died before their RBD. So, non-eligible designated beneficiaries of Roth IRA owners (those subject to the 10-year rule) are never subject to annual RMDs – no matter what age the owner died.

Question:

I have one large traditional IRA and one very small traditional IRA. Both were funded entirely with tax-deductible dollars. Both are at Vanguard. I would like to “merge” the small IRA into the large IRA to simplify my accounts. Is it possible to do this? How should I go about it?

Thank you.

Jane

Answer:

Hi Jane,

There is no problem with merging IRAs of the same type, such as traditional IRAs with other traditional IRAs, or Roth IRAs with other Roth IRAs. (You cannot combine your own “lifetime” IRAs with inherited IRAs.) This consolidation will make it easier for you to keep track of your account and to calculate RMDs when they become due. Simply contact Vanguard, and they will let you know how to go about it.

https://www.irahelp.com/slottreport/inherited-roth-ira-rmds-and-merging-iras-today%E2%80%99s-slott-report-mailbag

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

One of the more controversial provisions of the new SECURE 2.0 law concerns 401(k) catch-up contributions.

Most 401(k) plans – as well as 403(b) and governmental 457(b) plans – permit employees who are age 50 or older to make catch-up contributions. The limit for catch-ups in 2023 is $7,500, allowing for total elective deferrals of up to $30,000.

Beginning in 2024, SECURE 2.0 requires that certain high-paid 401(k) participants who want to make catch-ups must make them on a Roth basis. This means that the contributions will be made on after-tax pay, but the contributions and associated earnings can be distributed tax free if certain conditions are met. (This generally requires that the participant be 59 ½ or older and a five-year holding period be satisfied.)

There are several other new Roth provisions in SECURE 2.0 involving Roth SEP and SIMPLE contributions, Roth 401(k) employer contributions, and 529 plan-to-Roth IRA rollovers. But the catch-up rule is the only mandatory change.

Mandatory Roth catch-ups only apply to employees who have wages above a certain dollar amount in the previous year. For 2024, that dollar amount is $145,000 of 2023 wages. (The $145,000 threshold will be indexed in future years.) SECURE 2.0 specifically uses the term “wages.” But many self-employed business owners don’t have wages; instead, they have earned income. So, older 401(k) participants with earned income apparently aren’t covered by the new law. This means an age 50-or-older business owner with more than $145,000 of earned income in 2023 can still make pre-tax catch-ups to her 401(k) in 2024.

SECURE 2.0 says that prior-year wages must be with the employer sponsoring the 401(k). So, a high-paid employee who changes jobs will get a free pass from the mandatory Roth catch-up in the year he starts the new job. That’s because he won’t have any wages from his current employer in the prior year.

What if the 401(k) plan doesn’t already allow participants to make employee contributions on a Roth basis? After all, nothing requires a plan to offer the Roth option. Here’s where it gets tricky. It appears that a plan that doesn’t allow Roth contributions has two options next year. It can begin offering the Roth option for catch-ups – which would be mandatory for high-paid employees and optional for others. Or, it could continue not to allow Roth contributions, but then it couldn’t offer catch-up contributions.

One last point is that Congress mistakenly deleted a part of the tax code when drafting SECURE 2.0. The result is that the way the code now reads is that no employees (high-paid or not) will be able to make any catch-up contributions (pre-tax or Roth) starting in 2024. Hopefully, either Congress will fix this mistake or the IRS will turn a blind eye to it.

https://www.irahelp.com/slottreport/mandatory-roth-catch-contributions-required-2024

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

Do you have an IRA you are thinking about converting to a Roth IRA? There are many benefits to converting. You trade an immediate tax bill for the promise of tax-free earnings and distributions down the road. However, one benefit you may not have considered is the benefit to your beneficiaries. Inheriting a traditional IRA will have very different tax consequences than inheriting a Roth IRA. Converting your IRA to a Roth IRA is really a gift to your beneficiaries.

Consider the following example. Let’s say Gus named his three children as beneficiaries of his three-million-dollar traditional IRA. He never made any nondeductible contributions. When his children take distributions from their inherited traditional IRAs, those distributions will be fully taxable, but not subject to penalty. What if Gus converted his traditional IRA to a Roth IRA more than five years ago? All distributions from the inherited Roth IRAs paid to his children would be tax and penalty free. That is a very different result.

Traditional IRA Beneficiaries

If you are the named beneficiary of a traditional IRA, you will most likely face income tax consequences. This is because most funds in traditional IRAs are tax-deferred, but not tax-free. Uncle Sam will eventually want his share.  Distributions to beneficiaries will be taxable to the beneficiaries in the year taken.

To make matters worse, after the SECURE Act, most nonspouse beneficiaries no longer can stretch distributions over a lifetime but instead will be subject to a 10-year payout period, often with required minimum distributions during the 10-year period. That could mean big tax bills!

Roth IRA Beneficiaries

What if you are the named beneficiary of a Roth IRA? Roth IRAs work very differently. Tax-year contributions and converted funds are always tax-free when paid to beneficiaries. This makes sense because these funds are after-tax funds. The deceased Roth IRA owner has already paid taxes on them. Earnings will be tax-free if the five-year holding period that began with the deceased IRA owner’s first Roth IRA contribution or conversion is met. If not, earnings will be taxable until the five-year holding period has been satisfied. The good news for you is that earnings will not be considered distributed from the Roth IRA until all contributions and converted funds are paid out. The 10% early distribution penalty never applies to a distribution to either a traditional or Roth IRA beneficiary, regardless of their age or the age of the IRA owner.

While most nonspouse Roth IRA beneficiaries are also subject to a 10-year payout rule under the SECURE Act, there are no annual distributions required during the 10-year period. That means the entire inherited account could potentially grow tax free for ten years and then be withdrawn with no taxes owed.

Consider Conversion for Your Beneficiaries

The bottom line is that Roth IRAs are a great deal for a beneficiary. Most distributions will be income tax and penalty free. Consider a conversion not only for the benefits to you during your lifetime, but also as a gift to your heirs.

https://www.irahelp.com/slottreport/conversion-gift-your-beneficiaries

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

Question:

Am I correct to assume if I leave my Roth IRA to my 2 adult children, they will have to take all the money out by the end of year 10 and they will have NO taxes to pay on it because it is a Roth? They can take some out each year with NO taxes due, but have the option to leave it all in the account for 10 years, if they desire.

Thank you!

Louise

Answer:

Louise,

Assuming you have had the Roth IRA for 5 years, then you are correct – your children will inherit the entire account and it will be available immediately tax-free. However, they cannot leave the Roth IRA untouched forever. They can take as much or as little as they want each year, but they will have to empty their inherited Roth IRA accounts by the end of the 10th year after your death.

Question:

I had a couple of questions I was hoping you could clarify regarding Roth conversions. I have a 68-year-old client who is considering annual Roth conversions in order to reduce future liability for his wife (17 years younger than him) and for his children beyond that. Since he is older than 59 ½, does the 5-year rule still apply? Does it also apply to his heirs? Thanks!

John

Answer:

John,

Your 68-year-old client will have immediate access to his converted dollars. If he has had any Roth IRA for 5 years or more, he will also have immediate access to the earnings within those converted accounts tax-free. If he has not had any Roth IRA for 5 years, or if his first conversion is his first entry into a Roth IRA, he will have to wait 5 years for the earnings to be available tax-free. However, once he hits the 5-year mark for any Roth IRA, all clocks go away and every Roth IRA dollar is immediately available tax-free, even if he does conversions later in life. Additionally, once he hits the 5-year mark on any Roth IRA, his heirs will also have access to the entire inherited Roth IRA tax-free.

https://www.irahelp.com/slottreport/inherited-roth-iras-and-roth-conversions-todays-slott-report-mailbag-0

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport
This past week the Ed Slott team hosted another successful conference for our Elite IRA Advisor Group members. Well over 300 advisors from across the country descended on Washington D.C. for two days of intense IRA training. In addition to discussing all the newest SECURE 2.0 rules, we made sure to cover the foundational beneficiary principles created by the original SECURE Act, which went into effect in 2020. It is our steadfast belief – and our member advisors agree – the best way to learn new concepts is through repetition and reinforcement.

So, when we discussed the three beneficiary categories created by the SECURE Act, the response was not, “Oh, this again?” Instead, our advisor group, dedicated and committed to helping their clients and prospects, leaned in. As a team, we all appreciate the importance of identifying the proper IRA beneficiary category, understanding the rules applicable to each class, and implementing the correct inherited IRA payout structure. Repetition, repetition, repetition.

Here at the Slott Report, we have written numerous articles referring to “eligible designated beneficiaries” (EDBs), “non-eligible designated beneficiaries” (NEDBs), and “non-designated beneficiaries” (NDBs). Such conversations can go on indefinitely as different circumstances create an unending number of possible scenarios. However, as a basic refresher, the three SECURE Act IRA beneficiary categories (and their applicable payout rules), are as follows:

1. Non-Designated Beneficiary (NDB).

These are not people (for example, an estate or a charity). If the IRA owner dies before the required beginning date (“RBD” – April 1 after the year of the 73rd birthday), the inherited IRA account must be withdrawn by the end of the 5th year after death – the 5-year rule. If the owner dies on or after the RBD, required minimum distributions (RMDs) must be taken over the deceased IRA owner’s remaining single life expectancy – what we call the “ghost rule.”

2. Non-Eligible Designated Beneficiary (NEDB)

This group includes all living people who do not qualify as EDBs (defined below). NEDBs receive the 10-year payout rule. The NEDB 10-year payout structure is predicated on when the IRA owner died in relation to the RBD. If death is before the RBD, there are no annual RMDs during the 10-year window. If death comes on or after the RBD, annual RMDs apply within the 10 years.

3. Eligible Designated Beneficiary (EDB)

These living people can still choose to stretch RMD payments from the inherited IRA over their own single life expectancy. This group includes surviving spouses; minor children of the account owner until age 21; disabled individuals; chronically ill individuals; and those not more than 10 years younger than the IRA owner.

This brief overview of the beneficiary groups created by the SECURE Act could easily be expanded into a full day of training. Real-life permutation and different scenarios require an absolute mastery of these rules to ensure a proper outcome. (And this article does not even mention successor beneficiaries or the additional benefits afforded to spouses.) Bottom line: There is no substitute for a dedicated advisor who knows these categories cold.

https://www.irahelp.com/slottreport/3-ira-beneficiary-categories-%E2%80%93-again-and-again-and-again

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

It’s certainly not a bad problem to have. But employees with very high compensation cannot have their retirement plan benefits based on all of their pay. Instead, the tax code allows only compensation up to a certain dollar amount to be taken into account.

This dollar limit goes up most years based on the cost of living. For 2023, it’s $330,000. It was $305,000 for 2022 and $290,000 for 2021. The dollar limit is high enough that it’s not going to affect most employees. And, anyone earning more than the limit isn’t barred from receiving any benefit. Instead, compensation above the limit must be excluded when the amount of their benefit is calculated.

This restriction applies to company contributions in 401(k) and 403(b) plans. Those contributions are either matching contributions for employees making elective deferrals or across-the-board contributions for all plan participants. The compensation limit applies in both cases.

Example 1: Siobhan, age 55, is CEO of Waystar RoyCo and participates in its 401(k). Waystar matches 50% of each employee’s elective deferrals up to 6% of pay. In 2023, Siobhan will earn $500,000 and defer the maximum $30,000 ($22,500 + $7,500 catch-up). The plan can only recognize $330,000 of Siobhan’s pay. This limits her match to $9,900 [50% x (6% x $330,000)]. If the compensation limit didn’t apply, her match would have been $15,000 [50% x (6% x $500,000)].

Example 2: Waystar decides to make a flat 2% employer contribution to the 401(k) – instead of a match – for 2023. In that case, the contribution for Siobhan (with $500,000 in pay) will be limited to $6,600 (2% x $330,000). Without the limit, she could have received a $10,000 contribution.

The compensation limit also applies to SEP IRA contributions and sometimes applies to SIMPLE IRAs. If a SIMPLE IRA has an across-the-board contribution, the limit will apply. But if a matching contribution is made, the limit won’t apply. Even pay in excess of the dollar limit can be taken into account.

Compensation over the dollar limit is also disregarded in calculating benefits earned in defined benefit pension plans.

Finally, pay above the limit can’t be taken into account in IRS nondiscrimination testing. That testing is required to make sure that plans don’t provide disproportionately greater benefits for high-paid participants. Restricting pay in nondiscrimination testing makes it harder for plans to pass those tests. (Certain testing is not required if the employer makes “safe harbor” contributions.)

https://www.irahelp.com/slottreport/how-retirement-plan-compensation-limit-works

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

Question:

Greetings,

There seems to be a lot of conflicting information on Inherited Roth IRAs, for which I was hoping to get a definitive answer from the experts.

My understanding was that a non-spouse beneficiary (who is not an eligible designated beneficiary), who inherits a Roth IRA wouldn’t be subject to annual RMDs but would be subject to emptying the account within 10 years of the original account owner’s death (for account owners who died after 2019, that is).  I thought this exception was predicated on the original account owner of a Roth IRA not being subject to a required beginning date (RBD).

…..however, I have seen multiple articles online (perhaps incorrect) which suggest that non-spouse beneficiaries of Roth IRAs are actually subject to RMDs for years 1-9 and must then empty the account by year 10.

Any help/insight you could provide would be greatly appreciated.

Warm Regards,

Nicholas

Answer:

Hi Nicholas,

You are correct that there has been a lot of confusion about the rules for inherited IRAs subject to the 10-year rule in the wake of the IRS proposed regulations released in 2022. These proposed regulations surprisingly required annual required minimum distributions (RMDs) from inherited IRAs subject to the 10-year rule when an IRA owner dies on or after his required beginning date.

Roth IRAs are not subject to this requirement. Because Roth IRA owners do not have to take RMDs during their lifetime, they never reach their required beginning date (RBD). They are always considered to die before their RBD. Therefore, annual RMDs are never required during the 10-year payout period for inherited Roth IRAs.

Question:

Because of my high income, I annually do a back door Roth IRA contribution. Since I have no IRAs at end of year, 100% of my conversion is tax free.

In 2021, I did some freelance work and contributed $10,000 into a SEP-IRA in 2022, where it sits now.

As result, is my 2022 IRA backdoor going to be 100% taxable? How can I get back to tax-free conversions?

Thank you.

Bobbi

Answer:

Hi Bobbi,

It sounds like you have run into the pro-rata formula. This rule requires you to determine the taxation of any distribution, including a conversion, by looking at the total balance of all your IRAs and what percentage is taxable. The pro-rata rule does include SEPs in the overall balance. This means that your back-door Roth IRA conversions will be partially taxable.

To avoid future issues with the pro-rata formula, your options are limited. You might consider rolling over the SEP funds to a workplace plan if that is possible. Reverse rollovers from an IRA to a plan can only be done with taxable funds and are an exception to the pro-rata rule.

https://www.irahelp.com/slottreport/inherited-roth-iras-and-backdoor-roth-iras-todays-slott-report-mailbag

By Sarah Brenner, JD
Director of Retirement Education

If you recently converted your traditional IRA to a Roth IRA and you under 59 ½, you will want to know about the five-year rule for penalty-free distributions of converted funds from your Roth IRA. Many people are not aware of it. Not understanding how the rule works can result in heavy penalties when you withdraw your Roth IRA funds.

How the Rule Works

If you make annual contributions to your Roth IRA, you can always access those funds penalty-free. It’s that easy. However, when it comes to converted funds, it gets a little more complicated. If you are under age 59 1/2, you can always access your converted funds themselves tax-free. That makes sense because you already paid the tax bill when you did the conversion.

It’s a different story when it comes to the 10% early distribution penalty. If you are under age 59 ½, you must satisfy a five-year holding period on funds that were taxable when converted before you can access those funds penalty-free.

The five-year holding period will restart for each conversion. If the conversion was done at any time in 2022, the holding period for this five-year rule begins on January 1, 2022.

Avoid Confusion

How can you avoid confusion about the five-year rule for converted funds? First, remember that the five-year rule for distributions of converted funds is different from the other five-year rule that applies to Roth IRAs. That is the five-year rule for tax-free distributions of earnings from Roth IRAs. That rule works differently.

A good way to understand the five-year rule for penalty-free distributions of converted funds is to know exactly what it is set up to prevent. When you take a distribution from your traditional IRA and convert it to a Roth IRA, that distribution is taxable but not subject to the 10% early distribution penalty. This fact meant that soon after Roth IRAs became law, those looking for tax loopholes started telling younger IRA owners that they could get out of the 10% penalty by doing a conversion. IRA owners could just convert their IRA to a Roth IRA and then, the next day, withdraw funds from the Roth IRA tax and penalty free.

In response, Congress acted fast. Now we have this five-year rule that says if the converted funds are not held for at least five years or until age 59 ½, any withdrawal before that time would be subject to the 10% penalty the account owner would have paid if she withdrew from her traditional IRA.

There is a sure fire way to avoid having to worry about the five-year rule for converted funds. Don’t take early Roth distributions. If you invest long term and keep your Roth IRA investments intact for years until retirement, the rules are very easy. Everything is distributed tax and penalty free.

https://www.irahelp.com/slottreport/5-year-rule-converted-roth-ira-funds

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

In my April 12 Slott Report entry (“5 Reasons to Open a Roth IRA Immediately!”), I included a handful of points as to why it was imperative to open a Roth IRA, especially before the tax filing deadline. But a coin has two sides. Here are 5 reasons why you should NOT open a Roth IRA:

1. You have no earned income. To be eligible to open a Roth IRA (or traditional IRA) with a contribution, a person must have “compensation.” Wages, salary, commissions and/or other dollars received for personal services all qualify as compensation for IRA contribution eligibility. Things that do not qualify as compensation include pension and annuity income, interest income, capital gains or Social Security benefits. No compensation equals no Roth IRA contribution. (Of course, you could still open a new Roth IRA via a Roth conversion. Roth conversions do not require one to have any compensation.)

2. You have too much earned income. At the other side of the spectrum are individuals who make too much money to contribute to a Roth IRA. The phase-out ranges for Roth IRA eligibility in 2023 are $218,000 – $228,000 for those filing married/joint, and $138,000 – $153,000 for single filers. (In 2022 the phase-outs were $204,000 – $214,000 and $129,000 – $144,000, respectively.) If your modified adjusted gross income is above these phase-out ranges, then you are prohibited from contributing directly to a Roth IRA. (Yes, a Backdoor Roth conversion could be an option, but be wary of the pro-rata rule!)

3. You need the money soon. A person always has access to his Roth IRA contributions tax-and penalty-free. But if you need the money for a big purchase soon, or if you need the money for daily living expenses, it might not make sense to go through the process of opening a Roth IRA now. This is especially true if you are under age 59 ½ and need access to any earnings that might accrue within the Roth IRA. For those who need cash now or for a big purchase at some point in the near future, a non-qualified (regular) account may be a better option. If managed properly, you will have full access to the principal as well as the earnings.

4. Your beneficiary is a charity. Charities do not pay income tax. If your goal is to leave your IRA to a charity, then definitively do NOT fund a Roth IRA. Why pay taxes on the dollars yourself and go out of your way to create a tax-free income source…for an entity that won’t pay taxes anyway? Instead, fund a traditional IRA, take the deduction if you are eligible, and in the end, no one will pay taxes on any of the IRA dollars – neither you nor the charity.

5. You just don’t trust the government to keep its tax-free promise. Yes, tax laws are effectively written in pencil, and the tax-free benefits of a Roth IRA could, theoretically, be stripped away. If you think the rules will change and tax-free earnings on Roth IRAs will be eliminated from the tax code, then you probably should avoid a Roth IRA. (A queen-size mattress might be a better option.) However, it is our opinion that Congress has tipped its hand. They love Roth IRAs! This was evident in SECURE 2.0 with all the new Roth options – Roth SEP, Roth SIMPLE, Roth employer match, etc. Roth means tax revenue now, and that is music to the ears of a politician.

Before opening a Roth IRA – think it through. It is not the perfect fit for everyone.

https://www.irahelp.com/slottreport/5-reasons-why-you-should-not-open-roth-ira

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

Question:

Can I make a qualified charitable distribution (QCD) from my IRA to pay for my grandson’s summer church camp?

Susan

Answer:

Hi Susan,

You can only make a QCD if the donation would be 100% deductible as a charitable contribution if you made it as a regular donation (outside your IRA). This means that nothing of value can be received in exchange for the donation. A QCD would not be available here since something of value is being received in exchange for your donation.

Question:

My wife and I are both 62 years old and semi-retired. This year I will have earned income of approximately $10,000 and she will have earned income of $6,000. Can we both fully fund an IRA in 2023 ($7,500 each) even though her earned income was only $6,000?

In other words, do spousal incomes combine?

Thanks for your insight.

Greg

Answer:

Hi Greg,

Yes, you can each make an IRA contribution of $7,500 this year. You can make a $7,500 contribution because your compensation is at least that amount. And your wife can make a $7,500 contribution because your combined compensation ($16,000) minus the amount of your contribution ($7,500) – $8,500 – is at least as high as $7,500.

https://www.irahelp.com/slottreport/qualified-charitable-distributions-and-spousal-ira-contributions-today%E2%80%99s-slott-report

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

One important way that IRAs differ from company retirement plans is with respect to spousal financial rights. Most married IRA owners do not need spousal consent before designating a beneficiary other than the spouse. By contrast, most married plan participants do need to get their spouse to agree to a non-spouse beneficiary. And married participants in some types of plans also need spousal consent before taking a lump sum distribution from the plan.

The retirement plan spousal protection rules are part of ERISA. But ERISA doesn’t cover IRAs. So, spouses of IRA owners usually don’t enjoy any rights to the account. That is not the case in community (or marital) property states. In those states, the spouse must consent if the owner of an IRA (entered into during marriage) wants to designate someone else as beneficiary.

There are two types of ERISA financial protection for spouses. The first applies to all ERISA plans and is similar to the spousal consent requirement for IRAs in community property states: A married participant’s spouse is automatically the beneficiary unless the participant designates another beneficiary and the spouse consents.

Example 1: Anna participates in an ERISA 401(k) plan  She has designated her brother Jim as her 401(k) plan beneficiary, but her husband Kai will not consent to that designation. While participating in the plan and still married to Kai, Anna dies. The plan must pay the death benefit to husband Kai despite Anna’s beneficiary designation.

The second ERISA safeguard gives spouses even more protection. A married participant’s benefit must be paid in the form of a special type of annuity – unless the participant elects another form of payment and the spouse consents. This special annuity (called a “QJSA”) pays a monthly benefit over the participant’s lifetime and, if the spouse outlives the participant, pays the spouse a monthly benefit over the spouse’s remaining lifetime.

The QJSA requirement applies to all plans covered by ERISA – except for plans that don’t offer annuities as a payment form. Most 401(k) plans only offer a lump sum form of payment, so they are exempt. However, the rule does apply to most ERISA 403(b) and defined benefit pension plans.

Example 2: Jason in an ERISA-covered pension plan and is married to Jenna. He wants to receive an annuity from the plan that will pay him over his lifetime only, with no spousal benefit after he dies. The plan can pay Jason this type of annuity only if Jenna consents. If she doesn’t consent, he must receive the QJSA. Because of the spousal protection, Jason’s annuity payments under the QJSA would be smaller than if he had received an annuity over his lifetime only.

https://www.irahelp.com/slottreport/do-spouses-have-any-rights-retirement-plan-accounts

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

More 401(k) plans are starting to offer Roth options. If you now have this option, you may be wondering what the difference is between a Roth IRA and a Roth 401(k). Which account is right for you?

These accounts have a lot in common. Both offer the ability to make after-tax contributions now in exchange for tax-free earnings down the road if the rules are followed. However, there are some important differences between the two plans that you will want to understand.

Contribution Limits

One major difference is the amount that you may contribute. Your Roth IRA contribution is limited to a maximum of $6,500 for 2023 if you are under age 50. If you are age 50 or older this year, you may contribute up to $7,500. A Roth 401(k) offers much higher limits. You can defer $22,500 for 2023, or $30,000 if you are 50 or over.

Income Limits

Roth 401(k)s do not have any income limits on contributions. If you are a high earner, you will still be able to make deferrals. That is not the case for Roth IRAs. In 2023, your ability to contribute to a Roth IRA will begin to phase out when your income exceeds $138,000 ($218,000 if you are married, filing jointly). If your income is too high and you would like to fund a Roth IRA, you may want to explore the back-door Roth IRA strategy as a way around these limits.

RMDs

Roth IRAs have always offered the advantage of no required minimum distributions (RMDs) during your lifetime. This has not been the case for Roth 401(k)s. However, SECURE 2.0, the new law passed last year, will change that starting in 2024. Beginning next year, you will no longer need to take RMDs from your Roth 401(k) during your lifetime. At your death, eligible designated beneficiaries of your Roth IRA or Roth 401(k) will be subject to RMD requirements. However, most non-spouse beneficiaries of these accounts will be subject to a 10-year payout period under the SECURE Act.

Rollovers

Roth 401(k) funds can be rolled over to a Roth IRA. However, the opposite is not true. You may not roll over your Roth IRA to your Roth 401(k)

Qualified Distributions

When it comes to funding either a Roth 401(k) or a Roth IRA, the goal is to take tax-free distributions someday. For this to happen, you must have a qualified distribution. The rules for qualified distributions from Roth IRAs are more favorable than those for Roth 401(k)s. You can take a qualified distribution for a first home purchase, which is not allowed with a Roth 401(k). Also, your five-year period starts with your first contribution to any Roth IRA. For Roth 401(k)s, the five-year period for qualified distributions applies separately to each plan.

Nonqualified Distributions

What if you take a distribution that is not qualified? The rules for nonqualified distributions are also more favorable from Roth IRAs than Roth 401(k)s. With a Roth IRA, the ordering rules say that earnings will leave the Roth IRA last. This means that  taxable funds will come out only after all your other Roth IRA funds have been distributed. With Roth 401(k)s you are not so lucky. A distribution that is not a qualified distribution is subject to the pro-rata rule. A portion of each distribution will be taxed.

Which is Best for You?

You now understand there are some advantages to a Roth 401(k) especially when it comes to contributions. However, a Roth IRA may be preferable when it comes to taking distributions. Which is best for you? There is not one answer that is right for everyone, and it is not an all-or-nothing decision. If you are in the fortunate situation of having enough funds and are eligible for both a Roth IRA and Roth 401(k), you can contribute to both accounts! If you have questions about your own situation, you should consider meeting with a knowledgeable financial advisor.

https://www.irahelp.com/slottreport/roth-ira-vs-roth-401k

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport
Question:

Both of my parents passed away last year. My mother passed earlier in 2022 and I was able to take her year-of-death RMD out of the inherited IRA before the end of the year. My dad passed in October and once I got the inherited IRA transferred over in December, I forgot to take his year-of-death RMD until January of 2023. What forms will I need to complete to request a waiver, and would this be a good cause for a waiver?

Answer:

Sorry for the loss of your parents. Some good news is that you do not need to request a waiver for missing your dad’s year-of-death RMD. As of last year, the IRS granted an automatic waiver for a missed year-of-death RMD penalty if the RMD is taken by the beneficiary’s tax filing deadline, including extensions. Since you took the RMD in January, the year-of-death RMD has been satisfied, and no forms are needed.

Question:

I converted an IRA to a Roth seven years ago. I want to convert more IRA money to a Roth in 2023. My age is 64. When I convert the additional IRA money to a Roth: 1) Will I need to wait 5 years for this second conversion before I can take out any money? 2) Should I create a new account for the second conversion to keep the second conversion separate from the first conversion done 7 years ago? I’m getting different answers from different financial advisors/CPAs.

Thank you for your help.

Clay

Answer:

Clay,

The definitive answers are this:

1) No, you do not need to wait 5 years on the second conversion to take out any money. The entire balance is immediately available tax- and penalty free, including any earnings. This is because you have had ANY Roth IRA for 5 years AND you are over age 59 ½.

2) No, you do not need to create a second account for the second conversion – unless you want to. Whether you maintain multiple Roth IRAs or not, the IRS does not care. All they see is one consolidated Roth IRA under your name.

https://www.irahelp.com/slottreport/year-death-rmds-and-roth-conversions-todays-slott-report-mailbag

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

Time is running out! The tax filing deadline is Tuesday, April 18. Why is this important? Because that is the last day an IRA can be opened and/or funded for the previous year. Even if a taxpayer files for an extension, that does NOT extend the prior-year IRA contribution deadline. With that in mind, here are 5 reasons to stop procrastinating and open a Roth IRA immediately:

1. Get Your Clock Started. As mentioned, the deadline for making a prior-year (2022) contribution to a Roth (or traditional) IRA is April 18, 2023. If you already filed your taxes, you can still make a 2022 Roth IRA contribution without having to amend your return. So get it done! Even if the contribution is for a small amount, like $100, that will still start your Roth IRA 5-year clock ticking. And if you designate the contribution for 2022, you get a January 1, 2022 start date! Your 5-year clock just became a 3-year, 9-month clock.

2. The Magic of Compounding. The longer money has to grow within your Roth IRA, the more tax-free earnings you stand to accumulate. And if more accumulates now, then more can potentially compound on top of that. Albert Einstein famously said, “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t…pays it.” Another popular saying is, “It’s not about TIMING the market, it’s about TIME IN the market.”

3. Roth 401(k) Destination. If you have a Roth 401(k) and plan to roll it over to a Roth IRA at some point in the future, you will need to open a Roth IRA. But if you never had a Roth IRA, and if you wait until the last minute to establish the account to accept your rollover, your 401(k) dollars will adopt the 5-year clock of the Roth IRA. Yes, qualified plan distributions that can soften this blow, but why wait? Establish a Roth IRA now for any future Roth 401(k) rollovers.

4. Leverage a Conversion. You make too much money to contribute to a Roth IRA? Well, there are NO income limits on Roth conversions. Anyone with a traditional IRA is eligible to do a Roth conversion. It does not matter if you make zero dollars or a million. It does not matter if you participate in a work plan or not. Yes, a conversion is taxable and will add to your earned income for the year, but all future growth is tax-free! Also, a Roth conversion starts your initial 5-year clock just like a Roth IRA contribution. Only difference is a Roth conversion cannot be labeled as a “prior-year conversion.” You will receive a January 1, 2023 start date…but at least your Roth IRA will be off and running.

5. Roth IRA Distribution Ordering Rules. I don’t want to hear any excuses about “locking up my money” or “what if there is a financial emergency?” Roth IRA distributions follow strict ordering rules. Contributions come out first, then converted dollars, then earnings. A person always has access to their Roth IRA contributions tax-and penalty-free. Converted dollars are available after 5 years regardless of how old you are. If there is a true emergency, there is a good chance a portion of your Roth IRA will be available for withdrawal, no strings attached.

The time is now! Only a few days left to lock in a January 1, 2022 start date with a Roth IRA contribution. No more procrastination. No more excuses. Get it done.

https://www.irahelp.com/slottreport/5-reasons-open-roth-ira-immediately

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

Despite the reduction in the penalty for missing required minimum distributions (RMDs) in the new SECURE 2.0 law, it looks like you will still be able to get the IRS to waive the penalty altogether.

Before 2023, if you missed an RMD the IRS could impose a penalty equal to 50% of the missed amount. However, the IRS almost always waived the penalty if you took the RMD and filed Form 5329 (with a reasonable cause explanation) with the IRS. The explanation would address how the mistake occurred, what you did to remedy that mistake, and how you are making sure it doesn’t reoccur. When these procedures were followed, the IRS often excused the 50% penalty without even responding to the filing.

SECURE 2.0, signed into law on December 29, 2022, reduced the missed RMD penalty from 50% to 25% starting this year. And, if the mistake is corrected in a timely manner, the penalty is further reduced to 10%. A timely correction generally means taking the missed RMD and filing Form 5329 by the end of the second calendar following the year the RMD was missed.

With the reduction in the penalty from 50% to 25% or 10%, it wasn’t clear that the IRS would continue to waive the penalty if someone follows the same procedures that had worked in the past. Some commentators predicted that the ability to have the penalty reduced from 25% to 10% by a timely correction means that the IRS will no longer continue to be willing to excuse the penalty entirely.

However, that doesn’t seem to be the case. For some time the IRS has published a plain-English explanation of the RMD rules – called the “Retirement Plan and IRA Required Minimum Distributions FAQs” – on its website. The publication had previously included the following FAQ on waiving missed RMDs:

“Q9. Can the penalty for not taking the full RMD be waived?

Yes, the penalty may be waived if the account owner establishes that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. In order to qualify for this relief, you must file Form 5329 and attach a letter of explanation. See the Instructions to Form 5329.”

On March 17, the IRS updated certain FAQs to incorporate the new SECURE 2.0 RMD rules (e.g., the increase in the first RMD year from age 72 to age 73 and the reduction in the penalty). However, the IRS did not revise Question 9.

Although this is not official IRS guidance, keeping Question 9 is an unofficial indication that the IRS will continue to accept requests to waive the missed RMD penalty when you take the RMD and file Form 5329 with a reasonable cause explanation. It remains to be seen if the IRS will be as willing to grant these requests as it was prior to SECURE 2.0. Meanwhile, if you don’t have a good excuse for missing the RMD, you could consider using the correction method in SECURE 2.0 and pay only a 10% penalty.

https://www.irahelp.com/slottreport/irs-signals-it-will-still-waive-missed-rmd-penalties

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

Question:

I have been told that QCDs are not allowed from local and state government 457(b) plans.  I have looked at the accountant’s IRS manual, websites etc. and I can’t find any information that prohibits QCDs from this type of plan.  Can you shed some light on this?

Diane

Answer:

Hi Diane,

Sometimes tax rules can be very arbitrary! The tax code specifically only allows qualified charitable distributions (QCDs) from IRAs. A QCD cannot be done from any type of employer plan. There have been legislative proposals to change this, but so far none have been successful. You might consider doing a rollover to an IRA from your plan and then doing QCDs from the IRA.

Question:

I have two Roth IRAs with different firms.  One was started in 2008, and one was started last year. If I start withdrawing funds from the account started last year, am I in violation of the 5-year rule? Or since I started the first Roth IRA in 2008, am I beyond the 5-year window? I am over 65.

Answer:

The 5-year rule for Roth IRA distributions can be confusing. For a distribution from a Roth IRA to be considered a qualified distribution (meaning the earnings come out tax-free), a 5-year holding period must be satisfied. This 5-year period begins with an individual’s first contribution or conversion made to any Roth IRA. It does not restart even if other Roth accounts are opened. In your case, because you are over age 59 ½ and you opened your first Roth IRA more than 5 years ago, any distribution you take from any of your Roth IRAs would be completely tax and penalty free.

https://www.irahelp.com/slottreport/qualified-charitable-distributions-and-roth-iras-todays-slott-report-mailbag

Health Savings Accounts (HSAs) are rapidly growing in both size and in number. These accounts offer deductible contributions and tax-free distributions for qualified medical expenses. An HSA can be a valuable tool not only for paying for medical expenses but also for planning for your future. Here are 5 HSA rules you need to know.

1. Contributions are always deductible. Many times, higher income individuals are shut out of tax breaks. For example, there are income limits on Roth IRA contributions and on IRA deductibility for those who participate in a retirement plan at work. This is not the case with HSAs. There are no income limits for HSA contributions. You will never make too much money to be eligible for this tax break. If you make an HSA contribution, you may deduct that contribution regardless of how high your income is.

2. High deductible health plan required. To be eligible to make an HSA contribution, you must be covered by a high deductible health plan (HDHP). Not all plans qualify. To qualify as an HDHP, the plan must have a minimum deductible and a maximum out-of pocket expense. These amounts are indexed for inflation. Except for preventative care, an HDHP may not provide benefits until the deductible for the year is met. The easiest way to determine if your health insurance qualifies as an HDHP is to ask the insurance company.

3. Contribution limits. How much you can contribute to an HSA depends on your age and the type of health insurance that you have. Contributions are generally pro-rated for the number of months the individual is enrolled in an HDHP. Contributions can be made by the individual, the employer or anyone else, but an annual contribution limit applies. The contribution deadline is your tax-filing deadline, not including extensions (usually, April 15).

4. Tax-free distributions from your HSA for qualified medical expenses. Not only are HSA contributions deductible, but distributions from an HSA used to pay qualified medical expenses are tax-free. This means that both your HSA contributions and the earnings on those contributions will never be taxed if used for eligible medical expenses. Eligible expenses also include those of your spouse or a dependent. This is true even if your spouse or child is not covered under your HDHP.

HSAs offer a lot of flexibility when it comes to tax-free distributions. You can take a tax-free distribution from an HSA to reimburse yourself for qualified medical expenses for prior years as long as the expenses were incurred after you established your HSA and you have proof of those expenses.

5. Saving for medical expenses in retirement. A critical part of saving for retirement is saving for medical expenses. Many experts estimate that a large percentage of many retirees’ savings will go toward healthcare costs. If an HSA is funded annually now and you do not use the funds for current medical expenses, you can accumulate a significant amount that can help defray these costs in retirement.

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. You can even take tax and penalty-free distributions for Medicare premiums and out-of-pocket expenses. If you do not use the funds in your HSA for medical expenses, when you reach age 65 you may use them for any other purpose without penalty. However, any distributions not used for medical expenses will be taxable.

https://www.irahelp.com/slottreport/5-hsa-rules-you-need-know

Higher education expenses can be steep. Fortunately for those under the age of 59 ½ who need to dip into retirement savings to cover these costs, there is an exception to the 10% early withdrawal penalty. Before tapping your IRA, be sure to understand the fundamentals of this penalty exception. Here are the basics:

• The 10% penalty exception applies to IRAs only. It does not apply to workplace retirement plans like a 401(k) or 403(b).

• The exception only allows the IRA owner to avoid the early distribution penalty. Any pre-tax distributions taken will still be taxed as usual.

• There is no dollar limit for qualified higher education expenses.

• Qualified education expenses must be incurred in connection with a student’s enrollment in an “eligible educational institution.” If there is a question about eligibility, the educational institution should be able to tell you if it qualifies.

• The institution does not need to be located within U.S. borders.

• The 10% higher education penalty exception is not available to cover costs associated with primary or secondary school, e.g., high school.

• The higher education costs must be for the IRA account owner or his spouse, child, or grandchild of either the owner or spouse. Nephews, cousins and siblings do not qualify.

• “Qualified higher education expenses” are tuition, fees, books, supplies and equipment required for the enrollment or attendance of a student at an eligible educational institution. This also includes expenses for special-needs services incurred by or for special-needs students in connection with their enrollment or attendance.

• A person must be considered at least a half-time student for room and board to qualify as higher education expenses.

• Computer or other computer-related expenses qualify, even if the school does not require a computer as a condition of enrollment.

• IRA distributions must be made in the same calendar year that the bill is paid.

• The IRA custodian will issue Form 1099-R showing an early distribution. There will be nothing on this form to indicate that an exception to the 10% early distribution penalty applies. It is up to the taxpayer to properly claim the exception on their tax return.

• There is no age limit on who can qualify for the qualified higher education IRA penalty exception.

https://www.irahelp.com/slottreport/facts-qualified-higher-education-ira-penalty-exception

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

Question:

In a recent blog post, you said that the deadline for contributing to a Roth IRA for 2022 is April 18, 2023.  Does that include converting a traditional IRA to a Roth?

Answer:

You can make a prior-year traditional IRA or Roth IRA contribution but you cannot do a prior-year Roth conversion. So, you don’t get the extra time to do a Roth conversion and consider it a 2022 conversion. For a Roth conversion to count as taxable income for 2022, the traditional IRA distribution would have had to occur by December 31, 2022. If the traditional IRA distribution occurs anytime in 2023, the Roth conversion would be considered taxable income for 2023.

Question:

If you have a single HSA (health savings account) plan, can you use the funds for only your eligible medical expenses? Do you need a family plan to include your spouse and dependents expenses also?

Jim

Answer:

Hi Jim,

You must be covered by a high-deductible health plan (HDHP) to be eligible for an HSA. If you are the only one covered by the HDHP, you are eligible for a “self-only” (or individual) HSA. If someone else is also covered by the HDHP, then you qualify for a “family” HSA.

An HSA can be used for family members’ medical expenses, even if they are not covered by a HDHP. Let’s say you only have a self-only HSA because your spouse and dependents aren’t on your health insurance plan. You can still withdraw funds from your HSA for “qualified medical expenses” that your spouse or dependents incur.

The Last Episode of Season 1 of The Great Retirement Debate Airs Today!

In this season’s final episode of the Great Retirement Debate, Ed and Jeffrey discuss the topics covered over the last 18 episodes and what to expect from The Great Retirement Debate going forward.

You can stream The Great Retirement Debate at greatretirementdebate.com or on all major streaming platforms.

https://www.irahelp.com/slottreport/roth-conversion-deadline-and-hsa-coverage-today%E2%80%99s-slott-report-mailbag

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

When you leave your job and aren’t fully vested in your company plan account, the plan will forfeit your unvested portion. Recently, the IRS issued new guidance clarifying the forfeiture rules.

“Vesting” refers to the portion of your plan benefit that you actually own and that can’t be taken away from you. In a 401(k), 403(b) or 457(b) plan, employee contributions (pre-tax deferrals, Roth contributions and after-tax contributions), and associated earnings, are always 100% vested. But employer matching or profit sharing contributions, and their earnings, are often subject to a vesting schedule.

Most plans with a vesting schedule credit you with a year of vesting service for each 12-month period that you work at least 1,000 hours, Others credit you with vesting service based on your total period of employment. A vesting schedule can be either “cliff vesting” or “graded vesting,” as follows:

Years of Service                    Cliff Vesting                     Graded Vesting

1                                         0%                                        0%

2                                         0                                          20

3                                      100                                         40

4                                      100                                         60

5                                      100                                         80

6                                      100                                       100

Company plan benefits must become 100% vested, regardless of years of service, when you reach the plan’s “normal retirement age” (typically age 65) or when the plan terminates. Many plans also provide for 100% vesting if you die or become disabled.

When employees leave their job and aren’t 100% vested, their unvested portion is forfeited. Forfeitures are allocated to a separate account within the plan. Previously, the IRS had issued confusing rules on when the funds in the forfeiture account must be put to work and how they can be applied. The proposed IRS regulations, published on February 24, 2023, clear up the prior guidance. The new rules require that forfeitures be used no later than 12 months after the end of the plan’s fiscal year in which the forfeiture occurred. This new timing rule should simplify plan administration.

Example: Future Technologies has a layoff in December 2023. As a result of this, the Future Tech 401(k) plan incurred $200,000 in forfeitures during its calendar 2023 fiscal year. In the past, the plan may have had to use those forfeitures by the end of 2023, which would have been difficult to carry out. With the new IRS guidance, it has until the end of 2024 to apply the 2023 forfeitures.

Forfeitures cannot revert to the employer. The proposed rules specify how they can be used:

• To pay plan administrative expenses;
• To reduce future employer contributions; or
• To be allocated to existing participants’ accounts.

https://www.irahelp.com/slottreport/vesting-company-plans-and-new-irs-forfeiture-rules

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport
The Federal Deposit Insurance Corporation (FDIC) has been in the news recently as bank failures have made headlines. The FDIC is an independent agency created by Congress. It provides deposit insurance coverage for institutions such as banks, in the event that the bank fails and does not have enough assets to pay off depositors. The FDIC insures deposits up to $250,000. You may wonder if your IRA is protected by the FDIC. Here are five facts you need to know.

1. Not all IRAs are protected by FDIC insurance. The FDIC only protects deposit accounts at FDIC-insured institutions. If your IRA is invested in deposits such as a checking account, a savings account, or a certificate of deposit (CD), it would be protected. However, if your IRA is invested in stocks, mutual funds, or annuity products, it would NOT be protected by FDIC insurance. This is true even if your IRA is held by an FDIC-insured institution.

2. IRA deposits are insured separately at each institution. If you have multiple IRAs at different banks, each of your IRAs is insured separately up to the $250,000 limit.

3. Your IRAs are insured separately from other deposits. If you have both IRA assets and other assets at the same bank, your IRA deposits are insured separately from other deposits you might have at the same institution. For example, if you have a $200,000 IRA and $200,000 in non-IRA CDs at the same bank, all your deposits are fully protected.

4. Inherited IRA assets are also insured separately even if held at the same bank. For example, if you inherit an IRA worth $250,000 from your mother which is invested in a CD and you also have a $50,000 in IRA deposits in a different CD at the same bank, both your inherited IRA funds and your own IRA funds are fully protected by FDIC insurance.

5. Traditional and Roth IRA deposits are NOT insured separately. For purposes of the $250,000 limit for IRAs, any traditional and Roth IRA deposits at the same institution are aggregated. If you have $150,000 deposited in a Roth IRA and $200,000 deposited in a traditional IRA at the same bank, only $250,000 of your $350,000 total IRA deposits at that bank is protected by FDIC insurance.

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

Tax season is in full swing. That means that the 2022 tax-filing deadline is not far away. Are you considering making a 2022 IRA contribution? Time is quickly running out. Here are three tips to help you get your contribution done the right way.

1. DON’T Miss the Deadline. The deadline for making your 2022 IRA contribution is the tax-filing deadline, Tuesday, April 18, 2023. Do you have an extension? That won’t buy you more time. Even if you have an extension for filing your 2022 federal income taxes, your deadline for making a traditional or Roth IRA contribution is still April 18, 2023.

2. DON’T Exceed your Limits. The maximum contribution that you can make to an IRA for 2022 if you were under 50 is $6,000. If you reached age 50 or older in 2022, the maximum contribution limit is $7,000. The annual limit is aggregated for traditional and Roth IRAs. You may not contribute $6,000 to your traditional IRA and $6,000 to your Roth IRA for 2022.

Your IRA contribution generally may not exceed your taxable compensation or earned income for 2022. However, if you are married you may be able to use your spouse’s earned income or taxable compensation to make your IRA contribution.

If your 2022 modified adjusted gross income (MAGI) exceeded $129,000, if you are single, or $204,000, if you are married filing jointly, your ability to contribute to a Roth IRA for 2022 begins to be phased out. There are no income limits for traditional IRA contributions.

Age does not preclude you from contributing to an IRA. You may make either a traditional or Roth IRA contribution at any age, if you are otherwise eligible.

3. DO Maximize your Benefits. Many people miss out on the benefits of IRA contributions simply because they do not understand the rules This is particularly true when it comes to how participation in a company plan affects your IRA contribution.

Here is some good news: participating in a company plan does not affect your eligibility to make a Roth IRA contribution at all!

More good news . . . . if you and your spouse, if married, are not active participants in a company plan, you can fully deduct your traditional IRA contribution regardless of how high your income is.

However, if you were an active participant in your company’s retirement plan, and your MAGI exceeded $68,000 if you are single, or $109,000 if you are married, your ability to deduct your 2022 traditional IRA contribution begins to phase out. If you were not an active participant, but your spouse was, your ability to deduct phases out when MAGI reached $204,000.

https://www.irahelp.com/slottreport/3-tips-making-your-2022-ira-contribution

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

Question:

My daughter had two employers during 2022. The first employer offered a matching 401(k) plan in which she enrolled. The second employer (her current employer) offers no retirement plan benefit. In preparing my daughter’s 2022 federal tax return on TurboTax, she is unable to take advantage of a deduction for an IRA contribution, because the 2022 W-2 from her first employer in 2022 indicates that she is covered by a retirement plan. The 2022 W-2 from her current employer does not. Is there any way my daughter can get an IRA deduction on her 2022 tax return? Thank you for taking my inquiry.

Tom

Answer:

If an individual participates in an employer plan like a 401(k), even for a very short period of time during the year, they are considered an active participant in a retirement plan for the whole year. This means that if their income is above certain levels they are not allowed to deduct their traditional IRA contribution. For 2022 for single filers, the ability to deduct a traditional IRA contribution phases out when modified adjusted income is between $68,000 and $78,000. For those who are married, filing jointly, it phases out between $109,000 and $129,000. (Since TurboTax said she could not take a deduction, I am assuming she is over one of these levels.)

If your daughter (and her spouse if married) do not participate in a plan for 2023, she will be able to deduct her IRA contribution. There are no income limits for those who do not participate in a plan at all during the year.

Question:

I am 62 years old and retired. If I initiate a Roth IRA conversion from my employer’s 401(k) retirement savings plan in 2023 and make an additional Roth IRA conversion every year for the next 10 years, is the 5-year rule for tax-free withdrawals satisfied beginning in 2028 for all withdrawals, or does each Roth IRA conversion have its own 5-year rule?  Thank you.

Answer:

The 5-year holding period for tax-free distributions of earnings from a Roth IRA begins with the first Roth contribution or conversion. It does not restart with subsequent contributions or conversion. Since you are over 59 ½ and will have owned a Roth IRA for 5 years or more by 2028, any distribution of earnings taken in 2028 or later would be tax-free.

New Episodes of the Great Retirement Debate Podcast with Ed Slott and Jeffrey Levine, Airing Every Thursday!

In this week’s episode of the Great Retirement Debate, Ed and Jeffrey continue the discussion on whether you should convert or not convert your IRA to a Roth IRA.

You can stream The Great Retirement Debate at greatretirementdebate.com or on all major streaming platforms.

https://www.irahelp.com/slottreport/employer-plans-and-5-year-rule-todays-slott-report-mailbag

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

Spring break. Warm breezes and ocean waves and fancy cocktails are top of mind. The aroma of coconut suntan lotion entwined with barbecue smoke floats on salty air. And when morning light flickers through the palm fronds, like Jimmy Buffett said, “I sure could use a Bloody Mary, so I stumbled over to Louie’s Backyard.”

Ordering a Bloody Mary is a bit of a gamble. The foundational ingredients of tomato juice, vodka and spices are standard – but each recipe is a little different. And just how many frills will be loaded atop this concoction? Will it arrive with a lonely olive skewered with a single lime wedge? Or will it be gloriously garnished with chicken wings and crab legs and pickles and a grilled cheese sandwich, all billowing from an Old-Bay-rimmed glass?

401(k) plans are similar. There are plans with basic designs, and there are plans with shrimp and lobster tail skewers (figuratively). Will participants be satisfied with a 10 oz. plastic cup, or is it better to offer a 401(k) pint glass buried deep in extravagant extras…and risk the possibility that employees will be overwhelmed? Plan sponsors must determine their corporate goals, what design options to include, and what best meets the needs of all parties involved.

For example, a 401(k) is not required to include a Roth component. Plans can allow for pre-tax salary deferrals only. If your plan does not offer Roth, then an in-plan Roth conversion is impossible. The plan could be amended to add a Roth feature, but the plan sponsor would have to be on board. If no Roth option exists within a particular 401(k), the only way for a participant to leverage such tax-free benefits is to roll their plan dollars to a Roth IRA.

However, a 401(k) can be designed to limit access. In-service distributions could be forbidden. I once saw a plan that restricted participants from accessing their dollars until they were age 65, disabled, or dead. The business owner was so concerned about an employee quitting and using plan dollars to start a competing business, he designed a 401(k) “savings prison”…which was his right as sponsor. (As we say, “the law of the plan is the law of the land.”)

401(k) plans can allow for loans, or not. They can allow for after-tax (non-Roth) contributions, or not. A profit-share feature can be included…or not. Eligibility restrictions can be added (to a point), and certain types of employees can be either included or excluded from participating.

A plan can offer a matching component, or not. A “brokerage window” could be included as a design feature to allow participants to invest in nearly whatever the market offers, or a limited list of approved mutual funds could be the only investment options. SECURE 2.0 establishes yet another possible design choice – available in 2024, “pension linked emergency savings accounts” are created as way to separate an employee’s long-term retirement dollars from short-term emergency needs. But again – this is an optional plan feature.

How fancy is your 401(k)? Is it an over-the-top, loaded Bloody Mary, or is it a modest beverage with a limp celery stalk? Can participants take a sip, or is it utterly unwieldy? With both plans and cocktails, there is a happy medium. If the fundamental elements exist, a few well-considered and elaborate extras go a long way in satisfying the consumer. Choose wisely…and Cheers!

https://www.irahelp.com/slottreport/bloody-mary-and-401k

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

We continue to get questions about the ability of employees to withdraw from 401(k) plans while still working. The tax code includes certain restrictions on these in-service withdrawals. Plans must follow these rules or they risk losing their tax-qualified status.

But plans are also free to impose even more restrictive rules than required by the tax code. So, you’ll need to check your plan summary or ask your plan administrator or HR rep for the particular withdrawal rules that apply to your plan.

Here’s a summary of the various withdrawal restrictions:

Pre-tax deferrals and Roth contributions

Your plan cannot allow in-service withdrawals of pre-tax deferrals and Roth contributions (if offered), plus associated earnings, before age 59 ½ (except for hardship or disability).

After-tax contributions

If your plan offers non-Roth after-tax contributions, the plan can allow those contributions and their earnings to be withdrawn at any time, even before age 59 ½. This allows employees in some plans to use the “Mega Backdoor Roth” strategy to convert after-tax contributions to Roth IRAs.

Employer contributions

The IRS rules are very flexible in permitting in-service withdrawals of vested company contributions, such as matching or profit sharing contributions, and their earnings. Plans can 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. But most plans that allow in-service withdrawals of these funds don’t permit them until age 59 ½ (as with pre-tax deferrals and Roth contributions). This simplifies plan administration and prevents employees from getting hit with the 10% early distribution penalty.

Safe harbor contributions

Your employer may make “safe harbor” employer contributions to allow the plan to automatically satisfy certain IRS limits on contributions by highly-paid employees. There is no flexibility under the rules here. These safe harbor contributions, and associated earnings, aren’t eligible for in-service withdrawal before age 59 ½.

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 of rollover contributions and their earnings at any time, regardless of age or service. But this is not mandatory and once again, many plans set age 59 ½ as the cutoff point to make administration easier.

SECURE 2.0

The new SECURE 2.0 law includes several new in-service withdrawal opportunities. These include withdrawals for federally-declared disaster expenses (retroactively effective to January 26, 2021); for terminal illness (effective in 2023); for victims of domestic abuse and for emergency expenses (both effective in 2024); and for long-term care premiums (effective December 29, 2025)

Your employer isn’t required to offer withdrawals for any of these reasons. But if offered, you’d be able to access your accounts even before age 59 ½ without paying the 10% penalty (except possibly for terminal illness where the law is unclear).

Taxation

In-service withdrawals of pre-tax 401(k) funds are taxable and, if made before 59 ½, may be subject to penalty. Roth accounts and after-tax contribution accounts are handled separately. A Roth 401(k) withdrawal that is a “qualified distribution” comes out completely tax-free. If not qualified, the earnings part of the Roth withdrawal is taxable. The earnings portion of each withdrawal of after-tax contributions is also taxable.

https://www.irahelp.com/slottreport/can-i-reach-my-401k-funds-while-still-working

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

Question:

Hi,

I’m looking forward to the July workshop in Boston but hoping you can help with this question now.

What happens if an account holder who is over age 59 ½ does a Roth conversion from his traditional IRA but dies before the five-year holding period?

Matt

Answer:

Hi Matt,

If an IRA owner converts to a Roth IRA and then dies within five years, any converted funds will be immediately accessible to the beneficiary tax and penalty-free.

However, if this was the IRA owner’s first Roth IRA then the beneficiary would need to wait out the IRA owner’s five year holding period before any earnings in the Roth IRA would be available tax-free. The earnings would not be subject to the 10% early distribution penalty because that penalty never applies to inherited IRAs.

Looking forward to seeing you at our upcoming workshop in Boston in July!

Question:

Hi,

My wife and I each have inherited IRAs as well as our own, and I’ll be 73 next year. She’s a few years behind.

The RMD rules on our inherited IRAs are complicated but I’ve paid attention and think I have a good handle on ours.

But… there are too many accounts!  – my IRA, her IRA, my Roth, her Roth, my Inherited IRA, her Inherited IRA, her inherited Roth.  All have different rules and must be kept separate, but I’d like to use RMDs to eliminate the small accounts and simplify things.

My question is: When I calculate the RMD on my IRA, do I include the value of my inherited IRA in the calculation? Does taking an RMD from an inherited IRA count toward my RMD for a given year? One inherited IRA is fairly small, and I’d like to take it all to help satisfy my RMD next year and eliminate that account.

Thanks!

Steve

Answer:

Hi Steve:

The rules on aggregating RMDs can be tricky. You can aggregate RMDs for your own IRAs and take the total from one account. However, you cannot aggregate RMDs from your own IRAs with any from inherited IRAs. Unfortunately, you will not be able to take the RMD for your own IRA from the small inherited account.

New Episodes of the Great Retirement Debate Podcast with Ed Slott and Jeffrey Levine, Airing Every Thursday!

In this episode of the Great Retirement Debate, Ed and Jeffrey discuss whether you should convert or not convert your IRA to a Roth IRA.

You can stream The Great Retirement Debate at greatretirementdebate.com or on all major streaming platforms.

https://www.irahelp.com/slottreport/roth-conversions-and-inherited-iras-todays-slott-report-mailbag

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

Tax season is in full swing. That means that the 2022 tax-filing deadline is not far away. Are you considering making a 2022 IRA contribution? Time is quickly running out. Here are three tips to help you get your contribution done the right way.

1. DON’T Miss the Deadline. The deadline for making your 2022 IRA contribution is the tax-filing deadline, Tuesday, April 18, 2023. Do you have an extension? That won’t buy you more time. Even if you have an extension for filing your 2022 federal income taxes, your deadline for making a traditional or Roth IRA contribution is still April 18, 2023.

2. DON’T Exceed your Limits. The maximum contribution that you can make to an IRA for 2022 if you were under 50 is $6,000. If you reached age 50 or older in 2022, the maximum contribution limit is $7,000. The annual limit is aggregated for traditional and Roth IRAs. You may not contribute $6,000 to your traditional IRA and $6,000 to your Roth IRA for 2022.

Your IRA contribution generally may not exceed your taxable compensation or earned income for 2022. However, if you are married you may be able to use your spouse’s earned income or taxable compensation to make your IRA contribution.

If your 2022 modified adjusted gross income (MAGI) exceeded $129,000, if you are single, or $204,000, if you are married filing jointly, your ability to contribute to a Roth IRA for 2022 begins to be phased out. There are no income limits for traditional IRA contributions.

Age does not preclude you from contributing to an IRA. You may make either a traditional or Roth IRA contribution at any age, if you are otherwise eligible.

3. DO Maximize your Benefits. Many people miss out on the benefits of IRA contributions simply because they do not understand the rules This is particularly true when it comes to how participation in a company plan affects your IRA contribution.

Here is some good news: participating in a company plan does not affect your eligibility to make a Roth IRA contribution at all!

More good news . . . . if you and your spouse, if married, are not active participants in a company plan, you can fully deduct your traditional IRA contribution regardless of how high your income is.

However, if you were an active participant in your company’s retirement plan, and your MAGI exceeded $68,000 if you are single, or $109,000 if you are married, your ability to deduct your 2022 traditional IRA contribution begins to phase out. If you were not an active participant, but your spouse was, your ability to deduct phases out when MAGI reached $204,000.

https://www.irahelp.com/slottreport/3-tips-making-your-2022-ira-contribution

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

People on TikTok create investment advice videos? And I’m supposed to trust whatever this talking head is telling me? No chance. Of course, the person on TikTok could hold a number of higher education degrees and financial certifications, but until I know for sure who they are, what they are talking about, and what their objective is, I will keep my distance.

The internet cannot always be trusted. Artificial intelligence creates bogus news articles, deluded people spew falsehoods, and bad actors intentionally create information anarchy. Indeed, having a healthy dose of skepticism can keep a person out of trouble. Believe only half of what you see, and none of what you hear. Verify. Seek a trusted and knowledgeable third party to confirm or deny whatever information you just inhaled. Multiple resources must be consulted, especially with important decisions concerning retirement accounts (or anything else, for that matter).

Unfortunately, a heck of a lot of people follow a different mantra… “If it’s on the internet, it must be true.” Such thought process is utterly foreign to me…but how else to explain what we are seeing in actual court cases?

In the McNulty case, a Rhode Island nurse lost a chunk of her $400,000 nest egg when the Tax Court held that her self-directed IRA investment in gold coins…that she kept in her possession in her own house…was a taxable distribution. While gold coins and gold bullion can be IRA investments, they must be held by a qualified trustee or custodian. Why did Mrs. McNulty think she could keep the gold coins at her home in a safe? The internet said so. In the text of the decision, Mrs. McNulty states she found the company offering the gold coins while doing internet research. (I’m sure she saw glorious pictures of people with handfuls of gold coins clinking and tumbling through their fingertips.)

In the Lucas case from earlier this year, Robert Lucas was required to pay taxes and a 10% early distribution penalty on a $19,365 distribution from his 401(k). Based on his own internet research and failed understanding of the 10% disability penalty exception, he claimed an exemption from taxes and penalty because of his diabetes. Yet Mr. Lucas was working a full-time job in the year of the distribution. The court ruled there are degrees of disability, and his diabetes diagnosis did not rise to the level necessary to qualify for the 10% exception. By relying on a “financial website” for information, he improperly concluded his diabetes qualified him as disabled and that neither taxes nor the 10% penalty applied.

Just what bogus financial services website did Mr. Lucas stumble upon, and why did he trust it? What made Mrs. McNulty believe in the bad actor who created the internet site and falsely claimed she could keep her gold coins at home? Neither McNulty nor Lucas was being malicious. They were just gullible.

I think humans, for the most part, are programmed to trust one another. But the internet is a cesspool. For every cute kitten video, there are probably a hundred snakes. Be smart. Be diligent. Be aware of your surroundings. Knowledgeable, trustworthy people are ready to guide you through the morass. Seek them out and engage in thoughtful conversation before making any major decisions – regarding your retirement accounts or otherwise.

https://www.irahelp.com/slottreport/internet-said-so

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

Question:

I am interested in your interpretation of the RMD (required minimum distribution) rules using the following facts:

• Original IRA owner’s DOB is 1/21/29
• Original IRA owner’s date of death is 12/29/21
• IRA’s nonspouse beneficiary’s DOB is 7/21/54
• No RMD was taken in 2022 by the non-spouse beneficiary

Does the beneficiary have both a 2022 and a 2023 RMD that can be taken in 2023?

Thanks,

Dale

Answer:

Hi Dale,

The SECURE Act would apply to this inherited IRA. Under the SECURE Act, most nonspouse beneficiaries are subject to a 10-year payout rule. Additionally, the IRS proposed RMD regulations require RMDs to be paid during the 10-year period if the IRA owner died after his RMD required beginning date. That appears to be the situation here. However, the beneficiary would catch a break on the missed 2022 RMD because the IRS waived the penalty on these RMDs due to confusion over the new rules. That relief does not extend to 2023, so an RMD would need to be paid for this year.

Question:

My granddaughter (age 28) has a Roth IRA created from money earned from previous menial jobs. In 3 years she will complete her residency and as a radiologist, her earnings will be substantial and most likely she will not be eligible to contribute to a Roth IRA. Would her earnings also prevent her from continuing to contribute to a Roth 403(b) plan through her employer?

Noreen

Answer:

Good news for your granddaughter! While Roth IRAs are subject to income limits which prevent higher earners from contributing, Roth employer plans like a Roth 403(b) have no such limits. Her increased earnings will not preclude her from continuing to contribute to the Roth 403(b).

New Episodes of the Great Retirement Debate Podcast with Ed Slott and Jeffrey Levine, Airing Every Thursday!

In this week’s episode of the Great Retirement Debate, Ed and Jeffrey debate which is the better option, the Roth IRA, or the Roth 401k.

You can stream The Great Retirement Debate at greatretirementdebate.com or on all major streaming platforms.

https://www.irahelp.com/slottreport/rmds-and-employer-plan-contributions-todays-slott-report-mailbag

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

SECURE 2.0 is a mammoth piece of legislation that contains over 90 provisions that affect retirement accounts. While many of these provisions are not game changers, they still can be very helpful to specific groups of retirement savers. One of these is the provision that eliminates the 10% early distribution penalty that applies to net income attributable (NIA) when an excess IRA contribution is corrected by withdrawal.

How Excess IRA Contributions Happen

Excess IRA contributions are contributions that exceed the limit that someone can contribute to their IRA or Roth IRA for the year. Examples of excess IRA contributions include contributions that exceed the maximum annual contribution dollar limit, rolling over an amount that isn’t eligible for rollover, or making a Roth contribution when income exceeds the allowable limits.

NIA No Longer Subject to 10% Penalty

Excess contributions will be subject to a 6% penalty each year the excess amount remains in the IRA until they are fixed. One way to fix the mistake and avoid the 6% penalty is to withdraw the excess, plus or minus the earnings (NIA), by October 15 of the year after the year for which the contribution was made.

When an excess contribution, along with the NIA, is timely withdrawn, the excess itself is not taxable or subject to a penalty. However, the NIA is taxable for the year in which the excess contribution is made. Prior to SECURE 2.0, the NIA was also subject to the 10% early distribution penalty if the IRA owner was under age 59 ½. SECURE 2.0 changes this rule. Now, NIA is taxable, but not subject to penalty regardless of age.

Example 1: On January 7, 2023, Lourdes, age 43, made a $6,000 prior year contribution for 2022 to a new Roth IRA. She later discovered that her 2022 income was too high for her to contribute to a Roth IRA. On February 10, 2023, when her Roth IRA balance is $6,300, she decides to correct the excess amount by withdrawing it. To avoid the 6% excess contribution, she must also withdraw the NIA. When Lourdes takes the $6,300 distribution of the excess contribution, the amount of the excess contribution ($6,000) is not taxable. Only the amount of the NIA ($300) will be included in her income for 2023. However, it will not be subject to the 10% early distribution penalty due to SECURE 2.0’s elimination of the penalty on distribution of NIA when correcting an excess contribution.

https://www.irahelp.com/slottreport/secure-20-eliminates-penalty-nia

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

By now, most are aware the SECURE Act created a new class of beneficiaries called “eligible designated beneficiaries” (EDBs). This group includes surviving spouses, minor children of the account owner (until age 21), disabled individuals, chronically ill individuals, and people who are not more than 10 years younger than the IRA owner. (Those older than the IRA owner also qualify.)

EDBs have a distinct advantage over non-EDBs: they are allowed to stretch required minimum distributions (RMDs) from an inherited IRA. While non-EDBs are saddled with the newly created 10-year rule (which dictates the entire inherited IRA must be depleted by the end of the tenth year after the year of death), EDBs can blissfully continue to elongate the distribution period over their own single life expectancy. In many cases this can be decades. For years and years an EDB can minimize taxes by only taking the RMD. For years and years an EDB can leave the bulk of inherited Roth IRA dollars in the account, allowing them to grow tax free.

But what if an EDB wanted the 10-year rule? In fact, if the IRA owner died before the required beginning date (RBD) – when lifetime RMDs officially begin – an EDB can choose if they want the 10-year rule to apply or if they want the full stretch. But be aware: there is no flip-flopping back and forth. Once a decision is made, it is final. (There is a rare exception in a specific situation that allows an EDB to switch from the stretch to the 10-year when an RMD is missed, but that corrective change is not the focus of this article.)

Additionally, an EDB who inherits more than one IRA could choose to stretch one of the accounts and apply the 10-year rule to the other. There is no law dictating that all inherited IRAs must follow the same payout structure. So, when would the 10-year make sense to an EDB?

Example: Robert is 68. He has a traditional IRA and a Roth IRA. Robert names his younger sister Rita, age 65, as his primary beneficiary on both accounts. Rita qualifies as an EDB because she is not more than 10 years younger than Robert. Sadly, Robert dies.

Since Robert died before his RBD on his traditional IRA, there will be no RMDs in years 1 – 9 for a beneficiary subject to the 10-year rule. (If Robert died on or after his RBD, there would be RMDs in years 1 – 9 of the 10-year period.) As for his Roth IRA, all Roth IRA owners are deemed to die before the RBD, no matter how old they are, because Roth IRAs have no lifetime RMDs.

Rita establishes two inherited accounts. She wants to minimize taxes, so she elects to stretch RMD payments on the inherited traditional IRA. If Rita simply takes the annual RMD, not only should the account last for over 20 years (based on her age), but this extended payout period will also soften the tax hit, smoothing it out over two decades.

Rita elects the 10-year rule on the inherited Roth IRA. Since Roth IRA owners are deemed to have died before the RBD, Rita will have no RMDs in years 1 – 9 of the 10-year period, but she will have to empty the account at the end of year ten. Nevertheless, the entire inherited Roth IRA can remain untouched for a decade. When it is finally paid out, Rita will enjoy a tax-free windfall.

https://www.irahelp.com/slottreport/edbs-have-choice-stretch-vs-10-year

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

Question:

Hi,

Thank you for all the helpful insight on retirement. I wish I heard about your website earlier. I turned 72 last year and followed your advice on QCDs (qualified charitable distributions) but don’t know how to claim it.

My RMD (required minimum distribution) was $50k in 2022. I did a QCD of $10k and then withdrew $40k by the end of 2022. My taxable amount should be $40k and not $50k as listed on the 1099-R. How do I reflect that in my tax filing?

Thank you for your assistance.

Elly

Answer:

Hi Elly,

Thanks for the kind words. This is a question that trips up a lot of people. That’s because custodians are not required to indicate on the 1099-R which part of the annual IRA distribution was a nontaxable QCD. Instead, it’s up to you to show that on the 1040. In your case, enter $50,000 on line 4a (“IRA distributions”), but only $40,000 on line 4b (“Taxable amount”). You must also enter “QCD” next to line 4b. (Tax preparation software should handle that for you.)

Question:

Is there a limit on the number of IRA rollovers you can do in a given year? Are the rules different for trustee-to-trustee transfers?

Thanks,

Paul

Answer:

Hi Paul,

Yes, there is a limit. You can’t do a rollover of a distribution that you received within 12 months of a distribution that you previously rolled over (i.e., the “once-per-year rollover rule”). This limit applies across all your IRA accounts. It applies to traditional IRA-to-traditional IRA rollovers and Roth IRA-to-Roth IRAs, but not to company plan-to-IRA rollovers, IRA-to-plan rollovers or traditional IRA-to-Roth IRA rollovers/conversions. You can avoid this rule entirely by doing trustee-to-trustee (direct) transfers, rather than 60-day rollovers. There’s no limit on transfers.

New Episodes of the Great Retirement Debate Podcast with Ed Slott and Jeffrey Levine, Airing Every Thursday!

In this week’s episode of the Great Retirement Debate, Ed and Jeffrey debate SECURE Act 2.0 once again for part 2 of whether it’s big deal, or not a big deal for you, the consumer. This time around, the focus is on the Roth related provisions.

You can stream The Great Retirement Debate at greatretirementdebate.com or on all major streaming platforms.

https://www.irahelp.com/slottreport/qcd-reporting-and-once-year-rollover-rule-today%E2%80%99s-slott-report-mailbag

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

How much can you contribute when you’re in two different retirement plans at the same time or at different times in the same year (e.g., after changing jobs)? The answer is complicated because there’re actually two different contribution limits – the “elective deferral limit” and the “overall contribution limit.”

Elective Deferral Limit

The elective deferral limit (EDL) for 2023 is $22,500 (or $30,000 if you’re age 50 or older by the end of the year). The EDL is based on the total pre-tax and Roth contributions you make to ALL your 401(k) and 403(b) plans (but not 457(b) plans) in one calendar year. That’s the case even if the plans are sponsored by companies that aren’t related under the tax rules.

Example 1: Lisa, age 48, has a regular job with Acme Industries that sponsors a 401(k) and also has a solo 401(k) through a side-job sole proprietorship. The most that Lisa can defer between the two plans for 2023 is $22,500. It doesn’t matter that Acme Industries and Lisa’s own business are totally unrelated.

There are two important exceptions to this rule. Non-Roth after-tax contributions (if allowed by the plan) do not count towards the $22,500/$30,000 deferral limit. And, as mentioned, 457(b) plans have their own EDL. Often, hospital executives and high-ranking medical staff are eligible for both a 457(b) and a 403(b) plan. Those employees can defer up to the maximum deferral limit to EACH plan (although the over-50 catch-up isn’t available for hospital 457(b) plans).

Overall Contribution Limit

The overall contribution limit (also known as the “annual additions limit” or “415 limit”) for 2023 is $66,000 (or $73,500 if you make age 50-or-over catch-up contributions). This limit regulates the amount of ALL contributions (pre-tax deferrals, Roth contributions, after-tax contributions, and employer matching and profit sharing contributions) made to any company’s plan (or plans) in any year.

If you participate in two plans sponsored by the same company (or separate businesses considered one company under IRS rules), contributions made to both plans are usually aggregated for the overall limit (unless one of the plans is a 457(b)). But if you’re in two plans sponsored by unrelated companies, contributions are not aggregated. This allows you to get the benefit of a separate overall limit for each plan.

Example 2: Acme Industries and Lisa’s sole proprietorship (from Example 1) are unrelated businesses. For 2023, Lisa could theoretically receive a total of $132,000 ($66,000 x 2) in combined total contributions from the two plans, although practically that would be difficult to achieve. Lisa’s combined pre-tax and Roth contributions would still be limited to $22,500.

https://www.irahelp.com/slottreport/how-irs-contribution-limits-work-when-you%E2%80%99re-two-plans

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

Tax season is upon us. This is the time when you might be thinking about contributing to a retirement account. You may be interested in the Roth IRA, which offers the promise of tax-free withdrawals in retirement if you follow the rules. If you are making a 2022 Roth IRA contribution, here are 5 things you need to know:

1. Maximum Contributions: If you were under age 50 in 2022, the maximum contribution you may make to a Roth IRA for 2022 is $6,000. For those who reached age 50 in 2022, the maximum increases to $7,000. The annual limit is aggregated for traditional and Roth IRAs. For example, if you are under age 50, you could contribute $4,000 to your Roth IRA and $2,000 to your traditional IRA. You may not contribute $6,000 to your traditional IRA and another $6,000 to your Roth IRA for 2022.

2. Deadline for Contributing: The deadline for contributing to a Roth IRA for 2022 is April 18, 2023. If you have an extension to file your taxes, that does not give you more time. Sooner is better than later. Don’t wait until the last minute. You never know what may happen.

3. Taxable Compensation Requirement: You or your spouse must have taxable compensation or earned income to make a Roth IRA contribution. Passive income such as investment income will not work. Social Security income will not work either.

4. Reporting the Contribution: Be sure to let the IRA custodian know the year for which you are contributing. To avoid confusion, be sure you designate your contribution as a 2022 prior year contribution. Interesting fact – Who don’t you have to tell about your Roth IRA contribution? That would be the IRS. There is no requirement that you report a Roth IRA contribution on your 2022 federal tax return. It is good practice, however, for you or your tax preparer to keep track of your Roth IRA contributions.

5. Eligibility: You are never too old to contribute to a Roth IRA. Do you already contribute to a retirement plan at work? That is not a problem either. Participation in your company plan does not affect your eligibility to make a Roth IRA contribution.

Your income must be under certain limits to make a Roth IRA contribution. If your income is too high, you might consider a back-door Roth IRA. You simply contribute to a traditional IRA and convert. Sounds intriguing? Check with a knowledgeable tax or financial advisor to see if this is a good strategy for you. If you have pre-tax funds in any IRA, the pro-rata rule will apply to your Roth conversion. That would make part of your conversion taxable.

https://www.irahelp.com/slottreport/5-things-know-when-making-2022-roth-ira-contribution

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

QUESTION:

I just inherited my spouse’s inherited IRA (he got it from his father). He (my husband) was already taking required minimum distributions (RMDs) based on his own single life expectancy. My question is, do I have to empty that account in 10 years based on the SECURE Act? (I think this is correct, but if I don’t have to do it, I don’t want to!)

ANSWER:

You may not want to, but I’m sorry to say you have to. Based on the beneficiary rules under the SECURE Act, you are a successor beneficiary in this situation, and successors get the 10-year rule. Since this inherited IRA was being stretched (RMDs were being taken), as a successor you get to start a fresh 10-year period. Also, RMDs cannot be stopped. You will continue the same RMD payment schedule using the same single life expectancy factor that your husband was using, minus-1 each year, for years 1 – 9. At the end of the 10th year, the entire account must be emptied.

QUESTION:

I am a 27-year-old working individual who wants to convert a regular 401(k) into a Roth IRA. In addition to the regular tax imposed, will this transfer incur the 10% penalty usually levied on early withdrawals?

Thanks,

Emile

ANSWER:

Emile,

Roth conversions are not subject to the 10% early withdrawal penalty, no matter how old you are. If you have the 401(k) check paid directly to you, the plan is required to withhold 20% for taxes, but as long as you deposit the money into a Roth IRA within 60 days, it will qualify as a valid conversion and no penalty will apply. A better option would be to do a direct rollover (transfer). Have the 401(k) make the check payable to your Roth IRA custodian “for the benefit of Emile,” and the plan can send the entire balance with no 20% tax withheld. That way you get the full amount into a Roth IRA. Both of these transactions will be taxable, as you mentioned, but no 10% penalty will apply.

New Episodes of the Great Retirement Debate Podcast with Ed Slott and Jeffrey Levine, Airing Every Thursday!

In this week’s episode of the Great Retirement Debate, Ed and Jeffrey debate SECURE Act 2.0 and whether it’s big deal, or not a big deal for you, the consumer, in regards to the provisions affecting required minimum distributions (RMDs), qualified charitable distributions (QCDs) and the new 10% RMD penalty.

You can stream The Great Retirement Debate at greatretirementdebate.com or on all major streaming platforms.

https://www.irahelp.com/slottreport/inherited-iras-and-roth-conversions-todays-slott-report-mailbag

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

When IRA or retirement plan assets are withdrawn prior to age 59 ½, an early distribution penalty of 10% applies – in addition to any taxes owed on the distribution. However, there are exceptions in some cases, including the age 50 exception. While SECURE 2.0 expands this 10% penalty exception for public safety workers, the new law also creates a question.

The age 50 exception is available to federal, state and local public safety employees. It applies to work plans only – like a 401(k) – but does not apply to IRAs. When a plan participant engaged in a specific profession is 50 years old or older in the year she separates from service, she can take withdrawals from that employer’s plan. The distributions will be subject to tax but no 10% penalty. This group of employees includes law enforcement officers, public firefighters, emergency medical service workers, certain customs officials, border protection officers, air traffic controllers, nuclear materials couriers, U.S. Capitol Police, Supreme Court Police, and diplomatic security special agents of the Department of State.

SECURE 2.0 expands this exception to include private sector firefighters, corrections officers who are employees of state and local governments, and forensic security employees providing for the care, custody, and control of forensic patients. Additionally, the law extends the age-50 exception to public safety employees with at least 25 years of service with the employer sponsoring the plan. These expanded exceptions are effective for 2023.

Example: Barbara is an emergency medical service worker (which is a profession covered by the age-50 exception). She started her career at age 22. Now Barb is 47 and wants to retire due to health concerns, but the bulk of her assets are tied up in her workplace retirement plan. Prior to SECURE 2.0, Barbara would have had to wait to separate from service in the year she turned 50 or later in order to access her work plan dollars without penalty. However, with the expansion of the age 50 exception, Barbara can leave her job at 47 and still take advantage of the age 50 exception because she has 25 years of service with the employer sponsoring the plan.

UNKNOWN: Assume Barbara had spent her first 20 years as an emergency medical service worker, and then took a new job as a “forensic security employees providing for the care, custody, and control of forensic patients.” She rolled over her work plan from her first job to the plan sponsored by her new employer. After 5 years at the new job and at age 47, it is unknown if Barbara would still qualify for the “25 years of service” and the expanded age 50 exception. The issue is that the language in SECURE 2.0 indicates the exception applies to those “with at least 25 years of service with the employer sponsoring the plan.” While Barbara worked in approved professions for the full 25 years, it is unknown if her participation in two different plans during that period disqualifies her.

NOTE: If Barbara is disqualified from leveraging the “25 years of service” stipulation, she could wait to separate from service at her new job at age 50. At that point she would have full access to her plan funds without penalty. This includes all the dollars she rolled into the new plan from her first job, because they are all under the umbrella of the current plan where Barb properly separated from service at age 50 or later.

https://www.irahelp.com/slottreport/age-50-exception-question

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

Up to now, employer contributions to 401(k) (and other plans) had to be made to pre-tax accounts. One of the SECURE 2.0 changes already in effect allows employer contributions to be made to Roth accounts. Roth employer contributions are allowed in 401(k), 403(b) and governmental 457(b) plans. (In reality, 457(b) plans usually don’t have employer contributions to begin with.) Keep in mind that this covers employer contributions; many 401(k) (and other) plans already permit Roth employee contributions.

This change is one of several “Rothification” provisions within SECURE 2.0 that Congress hopes will raise revenue to help pay for other changes made by the new law. A similar provision allows SEP and SIMPLE IRA contributions to be made on a Roth basis.

Although this provision was actually effective on December 29, 2022 (the day SECURE 2.0 was signed into law), it will take recordkeepers some time to adjust their systems to accommodate the new provision. Also, recordkeepers will be reluctant to offer this option until the IRS clarifies several administrative issues, such as how employee taxes on Roth employer contributions will be reported. So, don’t expect your employer to be offering this option anytime soon.

And, even when recordkeepers are ready to institute this change, employers will not be required to offer it. Further, if your employer offers Roth treatment for employer contributions, it can’t impose it in on you. Instead, employees must elect to have their employer contributions deposited into the plan’s Roth account.

For tax purposes, Roth employer contributions will be treated the same as Roth employee contributions. This means that you’ll be taxed on the amount of the Roth contribution in the year it’s made. When you take a distribution from your 401(k), the contributions themselves will come out tax-free. Earnings on the contributions also will be distributed tax-free if made after age 59 ½, disability or death and after a five-year holding period has been satisfied.

Many plans use vesting schedules for employer contributions. If your plan has a vesting schedule, you need to work a certain number of years with your employer before you are partially or fully vested in your employer contributions. (Being vested means you have earned a benefit that can’t be taken away from you.) SECURE 2.0 says that only vested employer contributions qualify for Roth treatment. That may make this new option less attractive to you and create administrative headaches for your employer.

https://www.irahelp.com/slottreport/secure-20-allows-roth-employer-contributions-401k-plans

Question:

If I did a Roth conversion in 2022, do I have to wait 5 years before I can touch the amount $16,500 (the amount I converted) penalty free? The Roth has been open since 2003 and I’m over 59 ½.

Answer:

The five-year rules for Roth IRA distributions can be very confusing. In your case, because you are over age 59 ½, you will have immediate tax and penalty free access to any converted funds in your Roth IRA. You will also have tax and penalty free distributions of any earnings in your Roth IRA since those distributions are qualified. They are qualified because you are over age 59 ½ and you have had a Roth IRA for at least five years.

Question:

Hi Ed,

I continue to hear conflicting information regarding non-spouse inherited IRA’s. My client (age 55) inherited an IRA from her brother (age 70) who died in September 2021 – before his RBD. She established an IRA BDA account. Since she in a non-spouse and not an EDB, she has to withdraw the entire account within 10 years. My understanding is that she is not required to make annual withdrawals but can withdraw as she wants as long as the account is exhausted within the 10 -year period. Is this correct? I’m reading much about the IRS eliminating the penalties for not withdrawing in 2022 but thought that was if the decedent dies on or after his RBD.

Can you please help us clarify this?

Thank you

Janine

Answer:

Hi Janine,

The IRS proposed SECURE Act regulations that were issued last year created a lot of confusion over exactly how the 10-year rule works. They require RMDs be taken during the 10-year period when an IRA owner dies on or after their required beginning date. The IRS later issued guidance waiving penalties for not taking these RMDs for 2021 and 2022. You are correct that these rules do not impact your client. Because the IRA owner died before the required beginning date, no RMDs would be required during the 10-year term.

https://www.irahelp.com/slottreport/roth-ira-distributions-and-10-year-rule-todays-slott-report-mailbag

By Sarah Brenner, JD
IRA Analyst
Follow Us on Twitter: @theslottreport
The SECURE Act changed the game for inherited IRAs. For most beneficiaries, the stretch IRA is gone and has been replaced by the 10-year payout rule. However, the SECURE Act carved out some rules for special needs trusts for disabled or chronically ill beneficiaries that allow the stretch to continue for these beneficiaries.

Under the SECURE Act, the ability to use the stretch for chronically ill or disabled beneficiaries is available only to an applicable multi-beneficiary trust (AMBT). The SECURE Act said that an AMBT could have other beneficiaries besides the disabled or chronically ill beneficiary. The other beneficiaries did not have to be “eligible designated beneficiaries,” but they did have to be designated beneficiaries (i.e., individuals).

A charity does not qualify as a designated beneficiary, so naming a charity would have ended the ability to use the stretch for payments from the inherited IRA to the trust. Instead, the trust would have been required to use the remaining single life expectancy of the IRA owner or the five year rule, depending on when the IRA owner died.

SECURE 2.0 changes these rules for AMBTs. Under the new law, a qualified charity (under the regular IRS rules) will count as a designated beneficiary of an AMBT and allow a stretch payment from the inherited IRA to the trust using the special needs beneficiary’s life expectancy. This change is effective immediately.

Example: Stephan names a special needs AMBT for the benefit of his disabled son, Malik, as the beneficiary of his IRA. After Malik’s death, any remaining funds from the IRA are to be paid to a local charity. After Stephan’s death, distribution can now be paid from the inherited IRA to the AMBT over Malik’s life expectancy.

This change is good news for special needs beneficiaries with AMBTs. It is not uncommon for those setting up such trusts to have charitable intents. Now under SECURE 2.0, being charitable won’t have the unintended consequence of limiting favorable distribution options for vulnerable beneficiaries.

https://www.irahelp.com/slottreport/secure-20-modifies-rules-special-needs-trusts

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

A ton of questions on this topic have come across our desks, and we have seen swirling, hypnotizing spirals in the eyes of many an advisor. I can only imagine what the general public is thinking about the changes to the required minimum distribution (RMD) age. Since 1986, the RMD age was planted at 70 ½. In the past three years it has increased to 72, to 73, and will eventually jump to 75. No wonder there is confusion. When the heck am I supposed to start taking my RMD?!? I will keep this short and sweet to avoid any additional confusion…

The age a person uses to determine when lifetime IRA RMDs start is 100% predicated on date of birth. End of story. Yes, the very first RMD can be delayed until April 1 of the year after the first RMD year. The delay gives people a couple of months of wiggle room on that first RMD as they get settled into a distribution process. However, if the first RMD is delayed, you will have to take two RMDs in the “delayed” year – the delayed first RMD by April 1, and the second RMD by December 31. Also, delaying the first RMD to April 1 does not change your first RMD age. There is no free pass. As such, use this guide to determine precisely which RMD age to use:

Age 70 ½
For Births on June 30, 1949 or Earlier

Anyone born on June 30, 1949 or earlier should have already started lifetime IRA RMDs and is bound by the original age 70 ½ RMD rule. Nothing changes with the original SECURE Act or SECURE 2.0. Continue to take your annual RMDs as normal.

Age 72
For Births on July 1, 1949 through and including December 31, 1950

Anyone born on July 1, 1949 through and including December 31, 1950 should have already started lifetime IRA RMDs and is bound by the original SECURE Act RMD age change to 72. Nothing changes with SECURE 2.0. Continue with your existing RMD schedule.

Age 73
For Births on January 1, 1951 through and including December 31, 1959

Anyone born on January 1, 1951 through and including December 31, 1959 will use age 73 as their IRA RMD age. Note that we need a year to adjust to the new age, and 2023 is that adjustment year. People born in 1951 will all turn 72 this year. No RMD is required for these folks in 2023 because the rule is now age 73, and they won’t hit 73 until next year. Accordingly, no one will have their very first IRA RMD in 2023, because this year we are transitioning to the new age.

Age 75
For Births on January 1, 1960 or Later

We will cross this bridge when we get to it in a decade.

Do not overcomplicate things. What is your date of birth? Use it to determine your IRA RMD age. Done and done.

https://www.irahelp.com/slottreport/ira-rmd-age-made-easy

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

Question:

If a person turned 72 in 2022, and died before starting her traditional IRA RMDs (required minimum distributions), must her three children take an RMD (based on their ages) in 2022 and for the next 9 years?

Answer:

No. The IRA owner’s required beginning date for RMDs is April 1 of the year after the year she turned 72 (April 1, 2023). Since she died before that date, the children must only empty their share of the inherited IRA by December 31, 2032. No annual RMDs are required for years 1-9 of that 10-year period beginning in 2023. If the IRA owner had died on or after April 1, 2023, then RMDs would apply in years 1-9 of the 10-year period.

Question:

If a client’s birthdate is October 1, 1950, are the RMDs based on his turning 72 in 2022 or 73 in 2023?  The client received a notice in 2022 stating that the first one is due by April 1, 2023. But that occurs before they turn age 73, which is confusing.

Any help or insight would be great.

Thanks much,

Wesley

Answer:

Hi Wesley,

Since the client turned 72 in 2022, his first RMD is due for 2022. However, he was allowed to delay that first RMD into 2023 – until April 1, 2023. If he did that, he would have two RMDs paid in 2023 – the 2022 RMD due by April 1, 2023 and the 2023 RMD due by December 31, 2023.

https://www.irahelp.com/slottreport/lifetime-and-inherited-ira-rmd-rules-today%E2%80%99s-slott-report-mailbag

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

The SECURE 2.0 Act, enacted into law on December 29, 2022, makes over 90 changes to the IRA and employer plan tax rules. If that isn’t enough, many of these provisions aren’t immediately effective and (one isn’t effective until 2033). This article will focus on the key provisions in effect right now in 2023:

• Disaster relief.  SECURE 2.0 allows victims of federally declared disasters (such as hurricanes or tornados) to withdraw up to $22,000 from their IRAs or employer plan penalty-free. In addition, the taxable income on those withdrawals can be spread over three years, and the withdrawals can be repaid over three years. This provision is actually retroactive to January 26, 2021.
• RMD age. The first year that RMDs (required minimum distributions) must be taken from IRAs was extended from 72 to 73. This change affects anyone who turns age 72 after December 31, 2022. So, if you reach age 72 this year, your first RMD isn’t required until you turn 73 in 2024. The RMD age is delayed further to 75 if you reach 73 in 2033 or later.
• 10% early distribution penalty. Congress added several new exceptions to the 10% early distribution penalty for withdrawals before age 59 ½. These include disaster relief distributions (discussed above) and withdrawals to those who are terminally ill. Both penalty exceptions apply to IRAs and company plans. SECURE 2.0 also makes two changes to the 10% penalty exception for plan distributions made to public safety employees who leave employment in the year they turn 50 or older. The exception now applies to an employee under age 50 who leaves with at least 25 years of service with the employer. Also, the exception was expanded to include municipal corrections or forensic employees and private sector firefighters. Several other new exceptions to the 10% penalty come into play in later years.
• Roth accounts. Up to now, employer plan contributions (like 401(k) matches) had to be made on a pre-tax basis. Now, employers can make their contributions on a Roth basis. Also, SIMPLE and SEP Roth contributions are now available. Although SECURE 2.0 allows for these new Roth accounts right away, it may be some time before plan administrators and IRA custodians will have them in place.
• Annuity options. QCDs (qualified charitable distributions) are tax-free direct transfers from IRAs to charities. A one-time QCD of up to $50,000 can now be made to certain charitable annuities. However, these QCDs count against the annual $100,000 annual QCD limit. In addition, the limit has been raised on the amount of IRA or company plan funds that can be used to purchase a QLAC (qualified longevity annuity contact), A QLAC is a deferred annuity that extends RMDs until payments start. The new limit is $200,000 (indexed in future years).
• Penalty for missed RMDs. The penalty for missed RMDs, which was 50%, has been lowered to 25% and to 10% if the missed RMD is “timely” corrected (generally within two years). In the past, the IRS has usually waived the 50% penalty if a missed RMD was paid and Form 5329 was filed with a reasonable cause explanation. It’s not clear if the IRS will continue to do that.

https://www.irahelp.com/slottreport/secure-20-changes-already-effect

By Sarah Brenner, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

SECURE 2.0 is now the law of the land and one thing is very clear. Roth-O-Mania is here! In their quest for more revenue, Congress has created more options to save with Roth accounts. These accounts bring in the immediate revenue that Congress desperately needs. For retirement savers, these Roth options offer the promise of potential tax-free earnings and withdrawals down the road.

Here are 5 new Roth savings opportunities brought by SECURE 2.0:

1. Roth SEPs and SIMPLEs. Beginning in 2023, SEP and SIMPLE plans can allow Roth contributions. This is great news if you are a small employer. Now these easy and inexpensive retirement plans can offer a Roth option. You may need to be a little patient here. The logistics involved in getting SEP and SIMPLE Roth plans off the ground likely will mean that custodians will not have these options immediately available.

2. Roth Employer Matches. Prior to SECURE 2.0, employer matching contributions to a plan had to be made on a pretax basis. The new law changes this and allows plans to offer employees the option of having matching contributions made to a Roth account. If your employer makes a Roth matching contribution, you will pay income tax on it. This provision is effective for 2023.

3. Rollovers from 529 Plans to Roth IRAs. SECURE 2.0 allows rollovers from 529 plans to Roth IRAs. This provision is effective in 2024. If you had concerns about what to do with funds left over in a 529 plan, this may be a good opportunity. Leftover 529 funds can now be rolled over to a Roth IRA in the name of the 529 beneficiary. However, there are restrictions. For example, the 529 plan must have been in place for 15 years, annual rollovers cannot exceed the annual Roth IRA contribution limit, and total lifetime rollovers cannot exceed $35,000.

4. No Lifetime RMDs for Roth plans. Unlike Roth IRAs, Roth accounts in workplace plans have been subject to RMDs during the owner’s lifetime. Beginning in 2024, this will no longer be the case. Your Roth plan dollars will be excluded from the RMD calculation.

5. More Roth Catch-Up Contributions. As you get closer to retirement, the rules allow you to step up your retirement plan contributions. Starting in 2024, if you are higher income, age-50 or older, and you want to make catch-up plan contributions, you must make them as Roth contributions.

https://www.irahelp.com/slottreport/roth-o-mania

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

Question:

Hello Ed,

I have a question concerning Secure 2.0 pertaining to transferring “leftover” 529 plan account balances into a Roth IRA, beginning 2024. If I have no income in 2024, can I still transfer/contribute leftover 529 plan funds into a Roth IRA?  Thank you!

Mark

Answer:

Mark,

Only the beneficiary of the 529 (for example, the child for whom the 529 was created for) can receive the “leftover” 529 dollars into their own Roth IRA as a rollover. But there are limits. A lifetime maximum of $35,000 can be rolled over, the 529 must have been open for more than 15 years, and the annual rollover amount cannot exceed the annual IRA contribution limits. If you (Mark) are the beneficiary of this 529 but have no earned income, then you cannot roll any 529 funds into your own Roth IRA, because you are not eligible to contribute to an IRA (no income). If your child is the beneficiary of the 529, and if your child has earned income (i.e., is otherwise eligible to contribute to an IRA), then 529 dollars can be rolled into a Roth IRA for the child, despite you, as the parent, having no earned income.

Question:

I am currently 72 and already have several Roth IRA accounts. If I open a new Roth IRA today, will I need to wait 5 years to make an income-tax free withdrawal on the new account even though I have other established Roth accounts that have been in place for over 5 years?

Answer:

No, you will not have to wait 5 years for tax-free withdrawals from the new Roth IRA. Since you are over age 59 ½, and since you have had another Roth IRA opened for more than 5 years, you have met your obligations to have immediate tax-free withdrawals from the new account. The IRS does not care if you have multiple Roth IRAs held at multiple custodians. All they see is one big Roth IRA bucket, your age, and your original Roth IRA start year from more than 5 years ago.

https://www.irahelp.com/slottreport/529-plans-and-roth-iras-todays-slott-report-mailbag

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

If a person has a Traditional IRA and is of the age when lifetime required minimum distributions (RMDs) apply, then that person must withdraw a portion of that account annually. The amount to be withdrawn is based on the year-end balance from the previous year and a life expectancy factor as determined by one of the life expectancy tables. The rationale for RMDs is, the IRS permitted the account owner to delay paying taxes on the IRA dollars for potentially decades. Now it is time for the account owner to keep his end of the bargain and pay up. This is all straightforward enough.

If this same person also owns a Roth IRA, there are no RMDs to worry about during his lifetime. This makes logical sense. Roth IRA contributions are made with after-tax dollars, and the ultimate benefit of Roth IRAs is that any earnings within the account grow tax-free. Since existing Roth IRAs do not create any tax revenue for the government, there is no reason to force distributions like a traditional IRA. (Roth IRA dollars cannot remain in the account forever. Beneficiaries of these accounts do have to deplete them over a certain period. This pushes Roth IRA dollars back into circulation and out from under the tax-free umbrella.)

If this same IRA owner mentioned above also participated in a 401(k) through his employer, he would have an RMD on the entire balance within the plan. Regardless of whether the 401(k) dollars were held within the pre-tax “bucket” in the plan or the Roth bucket, all dollars would be factored into the RMD calculation.

This was the case until recently. Beginning in 2024, SECURE 2.0 eliminates the need to take RMDs on Roth plan dollars. This makes logical sense and brings Roth plan rules more in line with Roth IRA rules.

Example: John is 75 and retired. He has a 401(k) with a total balance as of December 31, 2022 of $1 million. This is split equally between pre-tax and Roth plan dollars. Based on his age, John will use a factor of 24.6 (from the Uniform Lifetime Table) to calculate his 2023 RMD. $1 million divided by 24.6 results in a 2023 RMD for the 401(k) of $40,651. John will need to take this RMD before the end of the year.

In 2024, the new SECURE 2.0 rule eliminating Roth plan dollars from the RMD calculation goes into effect. After John withdraws the 2023 RMD (and based on market fluctuations throughout the year), John’s 401(k) balance on December 31, 2023 is back to $1 million. It remains equally divided ($500K each) between pre-tax and Roth. John’s 2024 RMD will be calculated only on the pre-tax portion of his account. As such, using the applicable factor for a 76-year-old (23.7), John’s 2024 RMD will only be $21,097.

This is welcome news for anyone with a workplace plan who has been subject to RMDs on the Roth dollars within that plan. Historically, the only way for retirees to avoid RMDs on their Roth plan dollars was to roll over those funds to a Roth IRA. Beginning in 2024, thanks to SECURE 2.0, no longer will such a rollover be necessary to avoid unwanted RMDs on Roth plan dollars.

https://www.irahelp.com/slottreport/secure-20-eliminates-rmds-roth-plan-dollars-2024

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

We’re getting a lot of questions about the SECURE 2.0 provision allowing tax-free rollovers from 529 plans to Roth IRAs. Although this new rollover opportunity sounds exciting, there are a number of restrictions that may limit its appeal.

Section 529 plans offer a great opportunity to pay for college, K-12 tuition and student loan repayments. Nearly every state offers at least one plan. The most popular type of 529 plans are college savings plans, in which you make after-tax contributions that are invested in mutual funds or ETFs offered under the plan. Earnings grow tax-free, and you can withdraw the account tax-free if you use it for qualified educational expenses. You also may be able to take a state tax deduction for at least part of your contribution.

However, sometimes parents wind up not using the entire 529 account because, for example, their child gets a scholarship or doesn’t go to college. If you withdraw funds and don’t use them for educational expenses, the earnings in your account will be subject to income tax and a 10% penalty. The risk of unused funds has caused many parents to fund 529 plans conservatively or not to fund them at all.

In SECURE 2.0, signed into law on December 29, 2022, Congress attempted to address this problem. Starting in 2024, beneficiaries of 529 college savings accounts (e.g., children or grandchildren) will be allowed to do a tax-free rollover of up to $35,000 to a Roth IRA.

As usual, however, the “devil is in the details.” Here are those details:

• The $35,000 limit is a lifetime maximum.
• The Roth IRA must be in the name of the 529 beneficiary – not the 529 owner (if different).
• The 529 plan must have been open for more than 15 years. It’s not clear whether a new 15-year waiting period is required when someone changes 529 beneficiaries or if the waiting period that applied to the prior beneficiary can be tacked on. We’ll need further clarification from Congress or the IRS.
• Rollover amounts can’t include any 529 contributions (and earnings on those contributions) made in the preceding five-year period.
• Rollovers are subject to the annual Roth IRA contribution limit. So, for example, if the Roth IRA contribution limit in 2024 remains $6,500, then no more than $6,500 can be rolled over from a 529 to a Roth IRA in 2024. Further, any actual Roth IRA (or traditional IRA) contributions made by the 529 beneficiary would count against the $6,500 limit. The effect of this rule is that a full $35,000 529-to-Roth IRA rollover would need to be done over several years. It also means that the 529 beneficiary doing the rollover must have compensation in that year at least equal to the amount being rolled over.
• By contrast, the income limitations on Roth IRA contributions don’t apply to these rollovers. A 529 beneficiary would be able to do a 529-to-Roth IRA rollover even if she earns too much to make a Roth IRA contribution for that year.

https://www.irahelp.com/slottreport/secure-20-allows-rollovers-529-funds-roth-iras

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

Question:

I am confused regarding the requirements for making a qualified charitable distribution. Is it necessary for the donation to be sent directly from the financial company to the charity, or can the check be made out to the charity but sent to me and then sent to the charity?

Thank you,

John

Answer:

Hi John,

We get a lot of questions about the mechanics of doing a qualified charitable distribution (QCD) correctly. The rules require a direct transfer from your IRA to the charity. Either of the methods you describe would satisfy this requirement. What would not work would be having the check be made payable to you and then your giving the funds to the charity.

Question:

Hi Ed,

Very much appreciate all you and your team do. My question is as follows:

Client aged 78, took full $25,000 RMD in November 2022 from his IRA. The custodian mistakenly sent him an extra $10,000 on the last day of the year from the same IRA. Can we do a 60-day rollover and roll the $10,000 back into the IRA before we take the RMD in 2023? Or, will he need to first take this year’s RMD before he can roll it back into the IRA? Or, does neither option work?

Thanks

Answer:

Your client does have the opportunity to do a 60-day rollover. The $10,000 is not part of the 2022 RMD so it would be rollover eligible as long as all the other requirements for a rollover are met, such as the 60-day deadline and no other rollovers within the last 356 days.

The rollover can be done before the RMD for 2023 is taken. The first money out of an IRA during the year is considered an RMD (the “first-money-out” rule.) The $10,000 would be a rollover deposit and not a distribution, so that rule would not apply in your situation. There have not been any distributions in 2023 yet. Just be sure to add the $10,000 that was outstanding at year end to the balance used to calculate the 2023 RMD.

https://www.irahelp.com/slottreport/qcds-and-60-day-rollovers-todays-slott-report-mailbag

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

One of the provisions of the recently passed SECURE 2.0 that has gotten the most attentions is the one that allows some retirement account owners to delay their required minimum distributions (RMDs) a little longer. The new law pushes back the RMD age from 72 to 73. Eventually, it will go to 75, but that is not for another decade.

Who can benefit from this new rule?

The delayed RMD age applies to those who reach age 72 in 2023 or later. They will not have to start taking RMDs until next year (2024) when they reach age 73. The deadline for taking their first RMD would be April 1, 2025.

Example: Mick Mars, guitarist for the heavy metal band Motley Crue, will no doubt celebrate his 72nd birthday on May 4, 2023, with an all-night rager. He can also celebrate being able to delay his RMD from his retirement account. Mick will have to start taking RMDs for 2024 when he reaches age 73. He will need to take his first RMD by April 1, 2025.

Those who reached age 72 in 2022 are not so fortunate. They will be 73 in 2023, but they must continue to take RMDs.

Example: Stevie Van Zandt, guitarist for Bruce Springsteen and the E Street Band, may be born to run but he cannot run away from RMDs. He reached age 72 on November 22, 2022. He must take an RMD for 2022 by April 1, 2023, and will have to take his 2023 RMD by December 31, 2023.

Takeaway

If you reach age 72 this year, you are like Mick and you catch a break under SECURE 2.0. You can delay your RMD a little longer. You can party hard like Mick and celebrate that on your 72nd birthday.

However, if you are reaching age 73 this year, you and Stevie have something in common. You can’t outrun your 2023 RMD. You will need to take it by the end of this year.

https://www.irahelp.com/slottreport/who-can-delay-their-rmd-under-secure-20

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport

SECURE 2.0 includes a number of new ways a person under the age of 59 ½ can access retirement account dollars while avoiding the 10% penalty. Historically, there have been more than a dozen ways to sidestep the extra charge. Things like first-time homebuyer costs, higher education costs and disability are all legitimate exceptions to the early distribution penalty. While taxes could still apply, the 10% penalty is off the table for eligible distributions. Here are two of the new “penalty-free access points” to both IRA and company plan retirement accounts made available in SECURE 2.0:

Domestic Abuse. Sadly, domestic abuse is a common enough occurrence that it was included as a 10% penalty exception. Effective in 2024, a new exception is created for victims of domestic abuse that occurred within the previous 12 months by a spouse or domestic partner. Those in need of leveraging this exception can self-certify that they experienced domestic abuse and withdraw the lesser of $10,000, indexed for inflation, or 50 percent of the balance of the account.

This new exception is applicable to plans – like a 401(k) – and IRAs. “Domestic abuse” is defined as physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim, or to undermine the victim’s ability to reason independently, including by means of abuse of the victim’s child or another family member living in the household. Distributions taken under the domestic abuse exception can be repaid to the same or another like account over 3 years, and income taxes on repaid dollars will be refunded.

Financial Emergencies. In court case after court case, defendants pleaded for mercy when it came to waiving the 10% penalty after they withdrew their retirement dollars early. Consistently the same tune is played: “It was a true emergency,” or, “I was in dire straits and needed emergency money.” While I no doubt believe many of these defendants, the tax courts have consistently avoided setting any precedent for early access. Time after time the courts have declined any sort of one-off waiver. SECURE 2.0 cracks the door, albeit slightly, to those in need of emergency funds.

Effective in 2024, the new legislation includes a 10% penalty waiver for financial emergencies. However, this exception is extremely limited. Yes, if a person faces unforeseeable personal expenses or immediate financial needs relating to a personal or family emergency, they may dip into savings. Yes, the account owner can self-certify that the emergency is real. (No need for an independent financial analysis.) But the dollar amount is limited.

Distributions using the financial emergency exception are limited to one per calendar year and a maximum amount of $1,000. Additionally, no other emergency distributions may be taken in the following three years, or until the original distribution is repaid, or future salary deferrals (for plans) or contributions (for IRAs) meet or exceed the amount of the emergency personal expense distribution. This means that the retirement account must be made whole before any future emergency distributions using the exception can be taken.

$1,000 is no windfall, but it could help a person keep their head above water.

https://www.irahelp.com/slottreport/new-secure-20-10-penalty-exceptions-domestic-abuse-financial-emergencies

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

Question:

On reading your SECURE 2.0 information, a revised RMD (required minimum distribution) to age 73 was mentioned. Prior to this new legislation, 72 was the RMD age. If this is in effect now in 2023, is it correct that if you turn 72 in 2023, you won’t be required to take an RMD in 2023? Based on what I’ve read, the first RMD for a 72 year-old in 2023 would be pushed to age 73 in 2024?

Thanks in advance for your insights!

Answer:

You are correct. Anyone turning age 72 in 2023 is covered by the new SECURE 2.0 RMD rules. So, that person’s first RMD is due for the year he turns 73, which is 2024. There is no RMD for 2023. Additionally, the first RMD for 2024 can be delayed until April 1, 2025, but then there will be two RMDs in 2025 – the 2024 RMD and the 2025 RMD (due by December 31, 2025).

Question:

Does the IRS Uniform Lifetime Table change for those who will not have to take RMDs until they are 73 years of age?

Thanks,

Rick

Answer:

Hi Rick,

No, the Uniform Lifetime Table that became effective in 2022 will remain in place. So, when someone is required to start taking RMDs in the age 73 year, they would use a 26.5 life expectancy factor.

https://www.irahelp.com/slottreport/rmds-under-secure-act-20-todays-slott-report-mailbag

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

In our December 28 and January 2 Slott Report articles, we focused mostly on the provisions of the new SECURE 2.0 law that apply to IRAs. But many of the law’s changes are directed towards workplace plans, such as 401(k)s.

Here’s a rundown of the most important plan changes:

• RMDs for Roth 401(k)s. One of the big differences between Roth IRAs and Roth plan accounts has been that Roth IRA owners are not subject to required minimum distributions (RMDs), while Roth 401(k) participants are. This will change beginning in 2024, when Roth 401(k) accounts also become exempt from RMDs.
• Higher Catch-Up Contributions. If you’re age 50 or older, your plan probably allows you to make catch-up contributions above the regular deferral limit. For example, in 2023, you can make an extra $7,500 on top of the regular $22,500 of deferrals. Starting in 2025, employees age 60, 61, 62 or 63 can make even higher catch-up contributions. The age 60-63 catch-up limit for 2025 will be 150% of the regular catch-up limit in effect for 2024. (Higher catch-ups will also be available for SIMPLE IRA participants.)
• Mandatory Roth Catch-Up Contributions. Starting in 2024, certain age-50-or-older plan participants who want to make catch-up contributions must make them as Roth contributions. This rule applies to anyone with wages in excess of $145,000 (indexed for inflation) in the previous year (assuming their plan has a Roth option). Because of the reference in the law to “wages,” it appears that self-employed individuals (who don’t have wages) can continue to make catch-ups on a pre-tax basis.
• Roth Employer Contributions. Up to now, plan employer contributions have always been made on a pre-tax basis. Effective immediately, SECURE 2.0 allows (but doesn’t require) plans to offer employees the option of having company contributions made to a Roth account. Anyone choosing this option will pay income tax on the Roth contribution.
• Matches on Student Debt. Starting in 2024, SECURE 2.0 allows employers to make matching plan contributions on student loan repayments made by employees. This is optional.
• Solo 401(k)s. Currently, a self-employed person who wants to open a new solo 401(k) and make elective deferrals must establish the plan by December 31 of the plan’s first year. Under SECURE 2.0, sole proprietors (and other similarly-taxed businesses) now have until the due date (without extensions) of the individual’s tax return to open a new plan for the prior year. This applies to plans that start up in 2023 or later.
• Auto-Enrollment for New Plans. Beginning in 2024, many newly-established company plans will be required to automatically enroll employees in the plan – unless they choose to opt out. However, contrary to certain news reports, this provisions doesn’t apply to existing plans.
• Emergency Savings Accounts. Another new option for employers is to offer lower-paid workers a special sub-account within the plan for emergency savings contributions made on a Roth basis. Lifetime employee contributions to these accounts are limited to $2,500 (or a lower amount set by the employer). These contributions must be held in safe investments, and there are relaxed distribution rules, including no 10% penalty for those under age 59 ½. Emergency savings accounts are available in 2024.

https://www.irahelp.com/slottreport/secure-20-changes-apply-workplace-plans

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

The year 2023 has arrived. It is a new year, and we have new rules for retirement accounts thanks to SECURE 2.0 which Congress passed in the waning days of last year. SECURE 2.0 is a giant piece of legislation, clocking in at over 300 pages, and some of its provisions will not be effective for years to come. Here are some of our top takeaways from the SECURE 2.0 provisions that are effective right away.

1. The RMD age is delayed to 2023. For years the required minimum distribution (RMD) age was 70 1/2. Then the SECURE Act changed it to 72. For 2023, SECURE 2.0 has again pushed it back. The age that RMDs are effective is increased to 73 starting in 2023. This won’t help everyone. Anyone currently subject to RMDs under the old 70 ½ or 72 RMD age rules is not impacted and must continue to follow their existing RMD schedule.

For all those retirees who do not want to take an RMD or pay a tax bill for as long as possible. this is good news. This provision is helpful for who don’t need the money, and it also opens the door to another year of Roth conversions without concerns about RMDs.

However, for those who need to use the money in their retirement accounts for living expenses, the delay won’t matter. Also, even for those who want to take advantage of it, there is a downside since ultimately the funds in the account will need to come out. Future delayed RMDs will likely be larger, based on a higher account balance and a shorter life expectancy.

2. “Rothification” is here. Beginning in 2023, SEP and SIMPLE plans can allow Roth contributions. Also, plans can allow employer contributions to be made on a Roth (after-tax) basis. In future years, there will be even more opportunities to funds Roth accounts.

The logistics involved in getting SEP and SIMPLE Roth plans off the ground make it unlikely that these options will be available immediately as custodians will need some time to implement them.

SECURE 2.0 confirms that that the “Rothification” of retirement accounts has begun in earnest as Congress is opening the door to more Roth savings possibilities in its search for immediate tax revenue. What happens down the road when all tax-free Roth accounts translate into lost revenue is someone else’s problem.

3. Expanded exceptions to the 10% early distribution penalty. For 2023, SECURE 2.0 expands the age 50 exception by adding new categories of public safety workers and allowing penalty-free distributions after 25 years of service. SECURE 2.0 also includes a slew of new exceptions to the 10% early distribution penalty. Two of these are effective in 2023. Victims of disasters and those who are terminally ill will be able to access their retirement accounts early without penalty.

Congress recognizes that sometimes life happens, and people will need access early to their retirement funds. This is helpful for those in dire straits. The disaster provision is especially important because in the past such relief has been administered on an ad hoc basis and subject to political whims. For example, some hurricane victims got relief but victims of Superstorm Sandy were denied similar treatment.

The bad news here is that adding to an ever-growing list of exceptions only increases the likelihood of leakage of retirement savings dollars, and that will  prevent many Americans from having enough savings at retirement.

4. Missed RMD Penalty Changes. SECURE 2.0 reduces the penalty for missed RMDs from 50% to 25%. Additionally, if the corrected action is taken in a timely manner the penalty is further reduced to 10%.

On its face this seems like a good thing. However, the 50% penalty was seldom enforced and often waived for those who sought relief. The new rules may mean a smaller penalty but more people paying. This could translate into bad news for retirees but good news for Uncle Sam as the government collects more revenue.

5. Rollovers from 529 plans to Roth IRAs. SECURE 2.0 allows rollovers from 529 plans to Roth IRAs. This provision is not effective until 2024. It is NOT effective for 2023, but it is generating so much talk that it is worth mentioning.

This is great strategy for those who had concerns about funds left over in 529 plans if a child decided not to go to college or was fortunate enough to get a scholarship. Now these funds can potentially be rolled over to a Roth IRA. However, this is not the great Roth IRA strategy that some have been touting. There are many restrictions. The 529 plan must have been in place for over 15 years, the annual rollovers cannot exceed the annual Roth IRA contribution limit, and the total lifetime rollovers cannot exceed $35,000. There are other limitations as well.

https://www.irahelp.com/slottreport/top-takeaways-secure-20-2023

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

QUESTION:

I have an inherited IRA from my father. He was born 9-27-1927 and died 7-19-2019 at age 91. I was born 12-13-1952 and my age is 70. Two on-line calculators offered by brokerages show the factor this year (2022) to be 18.4 on my inherited IRA from my father. I cannot verify that factor on any of the IRS tables. Could you copy me or direct me to the correct table?

Many thanks,

Jim

ANSWER:

Jim,

Since you were born in 1952, you turned 67 in the year your dad passed away (2019). Required minimum distributions (RMDs) on that account started in 2020 when you turned 68. (Even though RMDs were waived in 2020 by the CARES Act, we still use 2020 to calculate future RMDs.) Using 68 and the Single Life Expectancy Table, your corresponding factor in 2020 was 20.4. We then subtract 1 from that original factor for each successive year. In 2022 your RMD factor is down to 18.4. In 2023 it will be 17.4, etc. Note that we must use the new version of the Single Life Expectancy Table introduced in 2022 and overlay those numbers back to your first RMD year in 2020.

QUESTION:

Can a client convert SIMPLE IRA assets to a Roth?  Thank you for your help.

Hugh

ANSWER:

Hugh,

Historically, SIMPLE plans were not allowed to maintain a Roth component. Meaning, you could not house Roth dollars within a SIMPLE. However, pre-tax SIMPLE dollars can be converted to a Roth IRA, which will exist outside of the confines of the SIMPLE plan. Be aware that, to avoid any penalties, there is a 2-year wait period before SIMPLE dollars can be withdrawn or converted to a Roth IRA. (*Note that SECURE 2.0, passed just last week, allows SIMPLE plans to have a Roth component beginning in 2023. How pre-tax SIMPLE dollars can be converted to Roth SIMPLE within the plan is still unknown.)

https://www.irahelp.com/slottreport/required-minimum-distributions-and-simple-iras-todays-slott-report-mailbag