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IRA BLOG

REQUIRED MINIMUM DISTRIBUTIONS: TODAY’S SLOTT REPORT MAILBAG

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

HSA BENEFITS THAT MAY SURPRISE YOU

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

INHERITED ROTH IRA: RMDS OR NO?

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

INHERITED ROTH IRA RMDS AND MERGING IRAS: TODAY’S SLOTT REPORT MAILBAG

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

MANDATORY ROTH CATCH-UP CONTRIBUTIONS REQUIRED FOR 2024

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

CONVERSION AS A GIFT TO YOUR BENEFICIARIES

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

INHERITED ROTH IRAS AND ROTH CONVERSIONS: TODAY’S SLOTT REPORT MAILBAG

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

THE 3 IRA BENEFICIARY CATEGORIES – AGAIN AND AGAIN AND AGAIN

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

HOW THE RETIREMENT PLAN COMPENSATION LIMIT WORKS

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

INHERITED ROTH IRAS AND BACKDOOR ROTH IRAS: TODAY’S SLOTT REPORT MAILBAG

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

THE 5-YEAR RULE FOR CONVERTED ROTH IRA FUNDS

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

5 REASONS WHY YOU SHOULD NOT OPEN A ROTH IRA

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

QUALIFIED CHARITABLE DISTRIBUTIONS AND SPOUSAL IRA CONTRIBUTIONS: TODAY’S SLOTT REPORT MAILBAG

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

DO SPOUSES HAVE ANY RIGHTS TO RETIREMENT PLAN ACCOUNTS?

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

ROTH IRA VS. ROTH 401(K)

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

YEAR-OF-DEATH RMDS AND ROTH CONVERSIONS: TODAY’S SLOTT REPORT MAILBAG

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

5 REASONS TO OPEN A ROTH IRA IMMEDIATELY!

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

IRS SIGNALS THAT IT WILL STILL WAIVE MISSED RMD PENALTIES

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

QUALIFIED CHARITABLE DISTRIBUTIONS AND ROTH IRAS: TODAY'S SLOTT REPORT MAILBAG

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

5 HSA RULES YOU NEED TO KNOW

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

FACTS OF THE QUALIFIED HIGHER EDUCATION IRA PENALTY EXCEPTION

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

ROTH CONVERSION DEADLINE AND HSA COVERAGE: TODAY’S SLOTT REPORT MAILBAG

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

VESTING IN COMPANY PLANS AND NEW IRS FORFEITURE RULES

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

FIVE FACTS YOU NEED TO KNOW ABOUT FDIC INSURANCE AND YOUR IRA

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.

3 TIPS FOR MAKING YOUR 2022 IRA CONTRIBUTION

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

EMPLOYER PLANS AND THE 5-YEAR RULE: TODAY'S SLOTT REPORT MAILBAG

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

BLOODY MARY AND A 401(K)

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

CAN I REACH MY 401(K) FUNDS WHILE STILL WORKING?

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

 

ROTH CONVERSIONS AND INHERITED IRAS: TODAY'S SLOTT REPORT MAILBAG

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

3 TIPS FOR MAKING YOUR 2022 IRA CONTRIBUTION

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

THE INTERNET SAID SO

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

RMDS AND EMPLOYER PLAN CONTRIBUTIONS: TODAY'S SLOTT REPORT MAILBAG

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

SECURE 2.0 ELIMINATES PENALTY ON NIA

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

EDBS HAVE A CHOICE: STRETCH VS. 10-YEAR

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

QCD REPORTING AND THE ONCE-PER-YEAR ROLLOVER RULE: TODAY’S SLOTT REPORT MAILBAG

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

HOW THE IRS CONTRIBUTION LIMITS WORK WHEN YOU’RE IN TWO PLANS

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

5 THINGS TO KNOW WHEN MAKING A 2022 ROTH IRA CONTRIBUTION

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

INHERITED IRAS AND ROTH CONVERSIONS: TODAY'S SLOTT REPORT MAILBAG

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

AGE 50 EXCEPTION QUESTION

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

SECURE 2.0 ALLOWS ROTH EMPLOYER CONTRIBUTIONS IN 401(K) PLANS

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

ROTH IRA DISTRIBUTIONS AND THE 10-YEAR RULE: TODAY'S SLOTT REPORT MAILBAG

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

SECURE 2.0 MODIFIES RULES FOR SPECIAL NEEDS TRUSTS

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

IRA RMD AGE MADE EASY

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

LIFETIME AND INHERITED IRA RMD RULES: TODAY’S SLOTT REPORT MAILBAG

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

SECURE 2.0 CHANGES ALREADY IN EFFECT

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

ROTH-O-MANIA!

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

529 PLANS AND ROTH IRAS: TODAY'S SLOTT REPORT MAILBAG

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

SECURE 2.0 ELIMINATES RMDS ON ROTH PLAN DOLLARS IN 2024

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

 

SECURE 2.0 ALLOWS ROLLOVERS OF 529 FUNDS TO ROTH IRAS

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

QCDS AND 60-DAY ROLLOVERS: TODAY'S SLOTT REPORT MAILBAG

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

WHO CAN DELAY THEIR RMD UNDER SECURE 2.0?

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

NEW SECURE 2.0 10% PENALTY EXCEPTIONS: DOMESTIC ABUSE & FINANCIAL EMERGENCIES

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

RMDS UNDER SECURE ACT 2.0: TODAY'S SLOTT REPORT MAILBAG

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

SECURE 2.0 CHANGES THAT APPLY TO WORKPLACE PLANS

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

TOP TAKEAWAYS FROM SECURE 2.0 FOR 2023

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

REQUIRED MINIMUM DISTRIBUTIONS AND SIMPLE IRAS: TODAY’S SLOTT REPORT MAILBAG

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

RANDOM REAL-LIFE QUESTIONS AND ANSWERS

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

Each day we receive dozens of retirement-related questions from advisor members of the Ed Slott Elite IRA Advisor Group. Conversations range from incredibly complex to obscure to, “I just need you to confirm what I was thinking.” Whether a long explanation is required or a quick comment, our members have our undivided attention. We take every question seriously and proactively fill in any information gaps. Here is a random sampling of some recent communications:

I was told by a very successful person that Roth conversions were ending. Is this true? This is definitively NOT true. There was a proposal in the Build Back Better bill to limit certain Roth conversion, but those proposals never materialized. There are no limits on Roth conversions.

Can a business owner contribute to both a SEP and a Roth IRA? Yes. Participation in a SEP has no impact on whether a person can also contribute to a Roth IRA. However, you must still abide by the Roth IRA income phase-out levels.

My client is being laid off in December. He turns 55 in 2023. Can he use the age 55 exception on his 401(k)? To leverage the exception, you must separate from service in the year you turn 55 or later. If he can delay his termination until January, then yes. If not, then unfortunately, he will not be able to use the age-55 10% penalty exception.

A 90-year-old tried to roll over his $1.9 million IRA in January. The bank erroneously put all the money into a regular brokerage account. He got sick and his son just discovered the mistake. Are we stuck with the distribution? Not stuck. One of the 12 reasons for self-certification when the 60-day rollover window is missed is, “an error was committed by the financial institution making the distribution or receiving the contribution.”

An annuity company paid out an IRA to my client that she inherited from her brother. She is an eligible designated beneficiary (EDB), so we can deposit that check into an inherited IRA for the stretch, correct? Sorry, no. She might be the sister and an EDB, but non-spouse beneficiaries cannot do 60-day rollovers with inherited dollars.

My client did a $150,000 Roth conversion. Now he is over the income limits to contribute to a Roth IRA. Is there any fix? No worries! Roth conversions do NOT count against total income for Roth contributions. See IRS Publication 590-A, “Worksheet 2-1. Modified Adjusted Gross Income for Roth IRA Purposes.”

With the market downturn, my client has a lot of capital losses. Can we use these to offset a Roth conversion? Only $3,000 of capital losses can be used to offset a Roth conversion.

Other recent inquiries touched on successor beneficiary scenarios, year-of-death RMDs and Roth 5-year clocks. We answered questions about excess contributions and ex-pats as beneficiaries. Trusts, 72(t) schedules, Roth conversions, NUA, pro-rata and how the 10-year rule works were all popular topics. Our members keep us on our toes, and we are happy to assist.

There is a mountain of confusion and misinformation out there. If you are an advisor and have interest in Ed Slott’s Elite IRA Advisor Group℠, consider joining us February 24 and 25 at our upcoming training event in Las Vegas.

https://www.irahelp.com/2-day/ira-workshop-2023-02

https://www.irahelp.com/slottreport/random-real-life-questions-and-answers

HAPPY HOLIDAYS! CONGRESS GIFTS SECURE 2.0

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

This holiday season Congress has given us SECURE 2.0. With no time to spare to avoid a government shutdown, they passed the $1.7 trillion Consolidated Appropriations Act of 2023 and sent it off the President for signature. Tucked inside the more than 4000 pages of legislation, you can find SECURE 2.0.

While this “Son of SECURE” is not exactly the game changer for IRAs that its “Dad” (the original SECURE Act) was, there are still many changes that will affect IRA owners and beneficiaries. For employer plans, there are significant changes. Not everything is effective for 2023. Some provisions are delayed for a few years.

Here are some highlights:

RMD age will increase to 73 for 2023: It will rise to 75, but not for a decade.

Savers Match introduced: The underutilized Saver’s Credit, which was intended to help lower income savers, has been overhauled and will be a government match paid directly to retirement accounts. But that won’t be effective until 2027.

IRA catch up indexed: Individuals who are age 50 or over can make an additional catch up contribution of $1,000. This amount will be indexed for inflation starting in 2024.

Supercharged plan catch up contributions: Starting in 2025, individuals who are ages 60, 61, 62, and 63 will be eligible to make larger catch up contributions to their plans.

More “Rothification”: The trend toward “Rothification” continues as Congress seeks immediate tax revenue. SEP and SIMPLE plans can allow Roth contributions beginning in 2023. Further, all plan catch-up contributions for age 50-or-over higher income employees must be Roth contributions, starting in 2024. Finally, beginning immediately, plans can allow employer matching contributions to be made on a Roth (after-tax) basis.

New exceptions to the 10% early distribution penalty: While retirement accounts are supposed to be for retirement, Congress recognizes that things can happen, and funds may need to be tapped early. SECURE 2.0 creates some new exceptions to the 10% early distribution penalty. Among these are disaster relief, domestic abuse, terminal illness and emergency need. Some of these are effective right away, but others don’t kick in until down the road.

Higher SIMPLE contributions: Beginning in 2024, higher salary deferrals to SIMPLE IRAs will be allowed as well as additional nonelective contributions.

Rollovers from 529 plans to Roth IRAs: In response to concerns that unused funds could be trapped in a 529 plan, Congress is allowing 529 plan funds to be rolled over to Roth IRAs. The limit is $35,000 and the 529 plan must be open for more than 15 years. This becomes effective in 2024.

Expanded QLACs: The 25%-of assets limit is repealed, and up to $200,000 can be used from an account balance to purchase a QLAC.

Penalty for missed RMDs reduced: The hefty 50% penalty for missed RMDs is reduced to 25%. If the missed RMDs are corrected in a timely manner, the penalty is further reduced to 10%.

EPCRS for IRAs: The IRS self-correction program, called the Employee Plans Compliance Resolution System (EPCRS), will be expanded to include inadvertent IRA errors.

Expanded QCDs: A one-time, $50,000 qualified charitable distribution (QCD) to a charitable gift annuity, charitable remainder unitrust, or a charitable remainder annuity trust is permitted. The QCD limit of $100,000 will be indexed for inflation beginning in 2024.

Repayment of qualified birth or adoption distributions: The SECURE Act included a provision that allows individuals to receive penalty-free distributions from their retirement account in the case of birth or adoption. There was no time limit on repaying these distributions. There will now be a three-year time limit.
NOT in SECURE 2.0.

What is also notable is what did not make the cut. While there was talk of shutting down back door Roth conversions, addressing the confusion with RMDs during the 10-year payout period under the SECURE Act, and expanding QCDs to plans, none of these items were included in the final legislation.

Stay Tuned in 2023

Keep tuning into the Slott Report in the new year! We will be talking about all the changes from SECURE 2.0, plus all other developments that affect your retirement account. The year 2023 promises to be a busy one, and we will keep you up to date with the latest news.

https://www.irahelp.com/slottreport/happy-holidays-congress-gifts-secure-20

THE 10-YEAR RULE AND ROTH CONVERSIONS: TODAY’S SLOTT REPORT MAILBAG

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

Question:

Ed, I started reading your newsletter and I wondered what you thought of  IRS Notice 2022-53. It made sense to me to the point where it said that “the beneficiary of an employee who died after the employee’s required beginning date must take the RMD beginning in the first calendar year after the calendar year of the employee’s death.”

But then in the end they lost me when it says it applies only if the employee died in 2020 or 2021. Seems like it should say 2022 as well.

This is of concern to me because I don’t want to take the RMD this year, and my dad died this year leaving me his IRA in respect of which he had started taking RMDs.

Regards,

Bret

Answer:

Hi Brett,

The IRS issued Notice 2022-53 in response to confusion created by the proposed regulations that require annual required minimum distributions (RMDs) during the 10-year payout period under the SECURE Act. This rule took many by surprise, so the IRS waived the rule for those who inherited in 2020 or 2021.

Your situation is a little different. Your dad passed away this year, so a different rule applies to you in 2022. That is the rule that says that if the IRA owner died before taking his entire RMD for the year of death, then the beneficiary must take it. Unfortunately, the IRS guidance does not help with this rule. The 10-year rule will not start for you until next year (the year after your father’s death). At that point hopefully the IRS will have clarified whether RMDs are required during the 10-year period.

Question:

Hello,

I found you via Google search!

I converted an IRA investment worth over $200k to a Roth IRA investment in December 2021 and paid taxes on the same. As you know, markets have been brutal and investments are worth far less.

I learned only this week that the conversion could be reversed via recharacterization by a deadline (which I believe was October 15) or I could apply for a private letter ruling from the IRS. Since October 15 was not so long ago, is there a way to reverse the Roth investment back into the IRA and save on taxes?

Thank you.

Answer:

Unfortunately, a missed deadline is not the problem here. As part of the Tax Cuts and Jobs Act of 2017, Congress ended recharacterization for conversions in 2018 and later. This remedy is no longer available for unwanted conversions.

https://www.irahelp.com/slottreport/10-year-rule-and-roth-conversions-todays-slott-report-mailbag-1

CONGRESS CONSIDERS SPENDING BILL THAT INCLUDES SECURE 2.0

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

As you may have read, Congress is considering passage of a $1.65 trillion spending bill that contains a number of retirement savings plan provisions. As of this morning (December 21), the bill has not been passed, and both houses of Congress only have until this Friday (December 23) to do so. If passed, President Biden is expected to sign the bill immediately.

The retirement provisions are known as the “SECURE 2.0 Act of 2022,” since they build on the original SECURE Act that was signed into law on December 20, 2019. But for IRA owners, the SECURE 2.0 changes are less dramatic than the original SECURE Act changes. For example, there’s no provision comparable to the original SECURE Act’s elimination of the stretch IRA and replacement by a 10-year payout rule. In addition, many SECURE 2.0 provisions don’t kick in until 2024 or even later.

One important change would delay the age when required minimum distributions (RMDs) are first required. Currently, the first RMD year is age 72. Under the proposed bill, the first RMD year would be age 73 starting in 2023 and age 75 starting in 2033.

The bill also contains a number of new exceptions to the 10% early distribution penalty for withdrawals before 59 ½. These include cases of domestic abuse, emergencies and terminal illness. These new exceptions have differing effective dates.

As a way of paying for the new retirement provisions, the bill allows or requires certain plan contributions to be after-tax Roth contributions. For example, SIMPLE and SEP plans would be able to accept Roth contributions, and plan catch-up contributions for higher income individuals would be required to be Roth contributions.

There are many other changes, including expanded qualified charitable contributions (QCDs), a reduced penalty for missing RMDs, and indexing of the IRA catch-up contribution. The plan changes include requiring automatic enrollment in newly-created plans, the elimination of lifetime RMDs for Roth 401(k)s, and higher catch-up contributions.

We will continue to follow this proposed legislation. If it passes, we’ll provide a more complete summary. Stay tuned to the Slott Report for any late breaking news.

In the meantime, Merry Christmas and Happy Holidays from all of us at Ed Slott and Company.

https://www.irahelp.com/slottreport/congress-considers-spending-bill-includes-secure-20

10 QUESTIONS TO ASK YOUR FINANCIAL ADVISOR

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

A repair man is currently fixing the sliding glass door on the back of my house. The track is worn and the rollers need replacing. No small task. The doors weigh a ton, you need one of those big suction cup things with a handle to grip the glass, and the windows must be carefully lifted up and out of the track. It is imperative to have the tools and know-how to replace the broken parts. Easy for the sliding glass door repair man. Not easy for this homeowner.

Unfortunately, not all repair people are equal. Some are great. Most are honest. Some are totally unqualified and should not be allowed into Home Depot. This range of skill, integrity and punctuality is not limited to the handyman profession. There are good attorneys and bad ones, quality doctors and quacks, skilled financial advisors and snakes.

It is important to do your due diligence when hiring anyone who claims to be an expert. The same holds true for financial professionals. Before dumping your entire piggy bank in the lap of a random advisor, be sure he or she has the skills and experience necessary to manage such a responsibility. Regarding IRAs, here are 10 good questions to ask your advisor:

1. IRA distribution planning requires specialized knowledge. Do you have expertise in this area?

2. What books have you read on the topic?

3. What professional training do you have in IRA distribution planning? What courses or programs have you taken? Can you show me the last course manual you received?

4. How do you stay current on key IRA tax laws? What services or resources do you rely on to stay up to date? Can you show me a sample?

5. What is the latest IRA tax rule you are aware of? When did it occur?

6. How do you determine the best option for lump sum distributions? What are all of my choices?

7. How would you keep track of my IRA beneficiary form? When should I update my IRA beneficiary form? What are the key events that would trigger a need for a review?

8. Can you show me the IRS life expectancy tables?

9. Do you know what will happen to my IRA after I die?

10. Who do YOU turn to when you have questions on IRA distribution planning? No one can know it all.

My sliding door now runs smooth as silk. Hire qualified and diligent professionals, and your experiences, including financial ones, should operate just the same.

https://www.irahelp.com/slottreport/10-questions-ask-your-financial-advisor-0

INHERITED ROTH IRA BENEFICIARY RULES AND PAYOUT OPTIONS FOR ELIGIBLE DESIGNATED BENEFICIARIES: TODAY’S SLOTT REPORT MAILBAG

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

Question:

Do adult children who inherited a parent’s Roth IRA in 2020 need to take an RMD each year during the 10-year payout rule or may they leave it alone and deplete the account at the end of the 10th year? I’ve heard it both ways and would like to know which is correct.

Thank you.

Pam

Answer:

Hi Pam,

Beneficiaries of Roth IRAs who are subject to the 10-year payout rule do not have to take annual RMDs during the 10-year period. The requirement to take RMDs within the 10-year period only applies when the IRA owner dies on or after her RMD required beginning date. But Roth IRA owners are not subject to RMDs, so they are always considered to have died before their RMD required beginning date.

Question:

I just inherited both a Roth IRA and a traditional IRA from a friend who was 64 years old at the time of death. I am 60 years old, so I am eligible to use the life expectancy rule for RMDs rather than the SECURE Act’s 10-year rule.

My question is whether I can elect to use the life expectancy rule for the traditional IRA (thus taking required annual RMDs), while at the same time electing to use the 10-year rule for the inherited Roth IRA (taking no annual RMDs on that account, but emptying it within 10 years after the year of death)?

Thanks,

Anthony

Answer:

Hi Anthony,

Yes, you can do that – as long as the IRA custodian allows it. As an eligible designated beneficiary (EDB), you can use the life expectancy rule to stretch out RMDs. But EDBs (with approval of the custodian) can instead choose the 10-year payout if the IRA owner died before his RMD required beginning date, which your friend did. There’s no rule preventing you from choosing one payout rule for the traditional IRA and another for the Roth.

https://www.irahelp.com/slottreport/inherited-roth-ira-beneficiary-rules-and-payout-options-eligible-designated

4 IRA TASKS TO GET DONE BY YEAR END 2022

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

The year 2022 is coming to a close. The holidays season is upon us. That means that the clock is ticking on year-end IRA deadlines. Be sure to get the following four IRA-related tasks done before we ring in the new year.

  • Take an RMD from your retirement account. If you have a traditional IRA and you are age 73 or older you will need to take a 2022 required minimum distribution (RMD) by the end of the year. If you are 72 in 2022, you will have a little extra time to take your first RMD. Your deadline will be April 1, 2023. Those who must take an RMD for 2022 should get this done sooner rather than later. May custodians have earlier internal deadlines to process these transactions and waiting until the last minute can result in mistakes. The penalty for not taking an RMD is a hefty 50%.
  • Take an RMD from an inherited IRA. Many beneficiaries are required to take 2022 RMDs from inherited IRAs. If you inherited an IRA prior to the SECURE Act or if you are an eligible designated beneficiary who inherited in 2020 or 2021, you will need to take an RMD for this year. Beneficiaries are also responsible for the year-of-death RMD if the IRA owner did not take it prior to death. (Beneficiaries subject to the 10-year payout rule under the SECURE Act catch a break. The IRS has waived the 50% penalty for 2022 RMDs that are not taken when a beneficiary is subject to the 10-year rule due to all the confusion surrounding this new rule.)
  • Do a QCD. The holiday season is the time when many are feeling charitable. A good way to give if you have an IRA and are age 70 ½ or older is to do a qualified charitable distribution (QCD). This is a tax-free transfer directly from your IRA to the charity of your choice. The annual limit is $100,000. A QCD can satisfy an RMD and is not included in modified adjusted gross income. There is no such thing as a prior-year QCD, so if this strategy is of interest to you for this year, you will need to get it done by December 31, 2022.
  • Convert to a Roth IRA. Tax rates are historically low, and markets have come down from their previous heights. Those conditions are ideal for Roth IRA conversions. Time is running out though for 2022. The deadline for converting for this year is December 31, 2022.

https://www.irahelp.com/slottreport/4-ira-tasks-get-done-year-end-2022

BIG INCREASE IN MANY 2023 RETIREMENT PLAN CONTRIBUTION LIMITS

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

The IRS has announced the retirement contribution limits for 2023. Because many of these limits are tied to inflation, it shouldn’t come as a surprise that some of the limits had a big jump. Here’s a summary:

IRA and Roth IRA Contributions

For the first time since 2019, the annual limit for annual traditional and Roth IRA contributions increased. The 2023 limit went up to $6,500. Keep in mind that this is a combined limit for traditional and Roth IRA contributions; you can’t make $6,500 of each kind of contribution. Also, if your compensation is lower than the $6,500 limit, you can’t contribute more than the amount of your compensation. (There’s an exception that allows a married person with little or no compensation to make a spousal contribution based on the spouse’s compensation.) In addition, Roth IRA contributions are subject to income limits (discussed below).

Catch-up contributions for IRAs are available for any year in which you’re age 50 or older at the end of the year. The age-50 catch-up limit for traditional or Roth IRA contributions isn’t tied to inflation, so it remains $1,000 for 2023

Roth IRA Compensation Limits

Your modified adjusted gross income (MAGI) must be below a certain amount for you to make a direct Roth IRA contribution. For 2023, if you are married and file jointly, you can make a full Roth contribution if your combined MAGI is less than $218,000, a partial Roth contribution if combined MAGI is between $218,000 and $228,000, and no Roth contribution if combined MAGI is above $228,000. The 2023 phase-out for single filers is $138,000 – $153,000.

Even if your MAGI is too high to make a direct Roth IRA contribution, you can still potentially make an indirect contribution by using the Backdoor Roth.

SEP and SIMPLE IRA Contributions

The 2023 limit for annual SEP contributions (employer only; SEPs don’t allow employee deferrals) is 25% of up to $330,000 of pay, but no more than $66,000. (For 2022, it’s 25% of up to $305,000 of pay, but no more than $61,000.) If you’re self-employed and your business is unincorporated, your 2023 limit is actually 20% of adjusted net earnings, but still no more than $66,000.

The deferral limit for SIMPLE IRA employee deferrals jumped from $14,000 to $15,500 for 2023. And the age-50 catch up maximum went up to $3,500 for 2023 (from $3,000).

Workplace Savings Plans

There was a big increase in the 2023 employee deferral limit for 401(k), 403(b) and 457(b) plans – from $20,500 to $22,500. And the age-50 catch-up limit jumped from $6,500 to $7,500. So, if you’re 50 or older by December 31, 2023, you can put away as much as $30,000 next year. Remember that this limit takes into account the total pre-tax and Roth contributions you make to ALL your plans in one calendar year.

There’s also a separate plan limit that regulates the amount of most contributions (made by both the employee and the employer) that can be made to ANY single plan in any year. The 2023 overall limit is $66,000, or $73,500 if you make age-50 catch-up contributions. That is up from $61,000/$67,500 for 2022.

https://www.irahelp.com/slottreport/big-increase-many-2023-retirement-plan-contribution-limits

ROTH CONVERSIONS AND REQUIRED MINIMUM DISTRIBUTIONS: TODAY’S SLOTT REPORT MAILBAG

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

QUESTION:

Hello Mr. Slott,

I have been doing Roth conversions this year from two small accounts (one a rollover IRA, the other a SEP-IRA) to consolidate into fewer accounts. The small SEP-IRA has been drained this year (2022) by converting the balance to my Roth.  The rollover IRA was reduced by one third this year, and the rest should be converted to the Roth in early 2023.

My question comes from the fact that I will turn 72 in July of 2023, so I must begin RMDs in 2023 based on December 2022 balances. If I finish draining/converting the rollover IRA in early 2023, will my RMDs be based on the December 31, 2022 balance? If I convert the balance in early 2023, will I still have an RMD? It seems unfair to be forced to take RMDs from an empty account based on the balance the previous year. But I can’t find anything that says otherwise.

Thanks in advance for any help you can provide,

Carol

ANSWER:

Carol,

If you have a balance in the traditional IRA account on December 31, 2022, then you will have an RMD based on that value in 2023. RMDs cannot be converted, so you must take the 2023 RMD before you continue with your conversion schedule next year. Even if you want to pay taxes on everything and convert the entire remaining balance, you must take the RMD first. That RMD cannot be rolled over or, as mentioned, converted. The only way to avoid a 2023 RMD on those dollars is to convert everything before the end of 2022.

QUESTION:

Can the sum of RMDs from more than one IRA (traditional, rollover and inherited) be taken 100% from an inherited IRA? For example, with a $10,000 RMD for a traditional IRA, a $5,000 RMD for a rollover IRA, and a $1,000 RMD for an inherited IRA, can the $16,000 sum of RMDs be taken 100% from the inherited IRA only and satisfy the RMD requirements for all three IRAs?

Thank you!

David

ANSWER:

David,

Sorry, but no. There are rules governing the aggregation of IRA RMDs. Some accounts can be aggregated for RMD purposes, some cannot. In your scenario, the traditional IRA and the “rollover IRA” are essentially the same thing. Both are just traditional IRAs. The RMDs for those two accounts can be aggregated and taken from one of the two traditional IRAs. The inherited IRA is a different type of IRA that cannot be aggregated with your traditional IRAs. The RMD from the inherited IRA can only be taken from that inherited IRA.

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

AUTOMATIC WAIVER OF 50% PENALTY FOR MISSED YEAR-OF-DEATH RMD

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

At this time of year, financial articles typically cover festive topics with creative holiday metaphors. “Stuff Your Stocking with These Year-End Retirement Tips” or, “Stay Off Santa’s Naughty List by Implementing These Great Planning Ideas.” Lighthearted and fun – albeit corny – such commentary is usually bright, cheerful and easy to read. As the year comes to a close, I’m sure I will include similar language in one of my upcoming articles.

This is not one of those articles.

Death does not care if it is the holiday season. Death does not care if you have an inflatable reindeer on your front lawn or if you have a menorah in the window. When death decides to visit, it will do so. And when death arrives, regardless of the time of year, it must be addressed.

For IRA owners subject to required minimum distributions (RMDs), death late in the year has typically resulted in a bit of a scramble. Beneficiaries need to confirm if the year-of-death RMD was already taken by the original IRA owner. If it was not withdrawn, beneficiaries have historically needed to get it paid out before the calendar turned. Prior to the SECURE Act proposed regulations (released this past spring), if the year-of-death RMD was not withdrawn by the end of that same year, there was a 50% penalty on the amount not taken.

Of course, there are ways to have the penalty waived if the missed RMD was due to reasonable cause. Beneficiaries can fill out IRS Form 5329 and indicate the missed RMD amount. They can submit a letter to the IRS explaining the situation and promise the oversight will never happen again. However, before taking those steps, they must still withdraw the missed year-of-death RMD while jumping through all the normal hoops of transferring the account into whatever beneficiary IRA best fits their situation.

With the proposed SECURE Act regulations, it’s less likely these missed RMD hoops will need to be navigated. Under certain circumstances, the rules grant an automatic waiver of the 50% penalty for a missed year-of-death RMD. This is incredibly helpful in situations when death arrives with only a few days remaining on the calendar. If the original IRA owner had yet to take his final RMD, the automatic waiver of the 50% penalty applies if that RMD is taken by the beneficiary’s tax filing deadline, including extensions.

Example: Grampa Richie, age 79, has a traditional IRA. His grandson Max, age 25, is the  beneficiary. Grampa Richie’s annual RMD is normally paid on December 15. However, he dies on December 10, 2022. Grandson Max is responsible for taking the 2022 year-of-death RMD. However, with such a short time before year end, he misses the 12/31/22 deadline. Max is eligible for an automatic waiver of the 50% penalty if he takes the 2022 year-of-death RMD by his 2022 tax filing deadline, plus extensions.

Articles like this are often inspired by real-life events. I spoke to an advisor the other day who said his client just died. He and I walked through next steps and discussed the year-of-death RMD. It is a lousy conversation to have – at any time of the year. But death doesn’t care.

Hopefully that family can find some peace this holiday season.

https://www.irahelp.com/slottreport/automatic-waiver-50-penalty-missed-year-death-rmd

TAKE OUR RMD QUIZ

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

If you have an IRA, you should know that the funds that are in the account can’t stay there forever. The rules say that you must begin to take required minimum distributions (RMDs) from your IRA once you reach your golden years. How well do you know the RMD rules? Take our RMD Quiz and find out!

Meet Gary, who is about to embark on his retirement years. This year, 2022, has been a great year for Gary. He just retired from his job, and he celebrated his 72nd birthday. He has a traditional IRA, a Roth IRA and a 401(k) plan. The sole beneficiary of all three of his retirement accounts is his wife, Linda, age 60. Can you answer the following five questions about Gary and his RMD? The correct answers can be found at the bottom of the quiz.
1. From which retirement accounts will Gary need to take RMDs for the year 2022?

A. His Traditional IRA and his Roth IRA

B. His Traditional IRA and his 401(k)

C. All three retirement accounts

 

2. What is the deadline for Gary to take his first RMD from his traditional IRA?

A.     December 31, 2022

B.     December 31, 2023

C.     April 1, 2023

D.    April 15, 2023

 

3. To calculate his first IRA RMD, Gary should use which IRS life expectancy table?

A. The Single Life Expectancy Table

B. The Uniform Life Expectancy Table

C. The Joint Life Expectancy Table

 

4. Gary can satisfy the RMD from his traditional IRA by taking it instead from either his Roth IRA or his 401(k).

A. True

B. False

 

5. If Gary fails to take his IRA RMD by the deadline, he will be subject to what penalty?

A. A 6% penalty

B. A 10% penalty

C. A 25% penalty

D. A 50% penalty

 

Answers: 1. B, 2. C, 3. C, 4. B, 5. D

https://www.irahelp.com/slottreport/take-our-rmd-quiz

INHERITED IRAS AND ROTH IRA CONTRIBUTIONS: TODAY’S SLOTT REPORT MAILBAG

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

Question:

Hi,

I have read with interest, Ian Berger’s article titled “IRS Waives 50% Penalty for Missed 2021 and 2022 RMDs within the 10-Year Period.” I am glad that this is starting to be clarified by the IRS.  Has any guidance been provided yet on how to calculate the future RMDs?

My father passed away in March of 2020 and I was a beneficiary of his IRA.   If I had an inherited IRA with any value on Dec 31, 2021, I assume that I would not need to take an RMD in 2022 (nor in 2021.) I assume that if the value on December 31, 2022 is $100,000, I will have 8 years to take the distributions, starting in the 2023 tax year?  Would the RMD be calculated at 1/8 of the balance, $12,500?

Sincerely,

Kevin

Answer:

Hi Kevin,

The IRS position in the proposed SECURE Act regulations that RMDs would sometimes be required during the 10-year period was a big surprise to almost everybody. In response, to help with the confusion, the IRS issued Notice 2022-53 which waived the 50% penalty for 2021 and 2022 RMDs for those affected by this rule.

This relief, while helpful, does not answer the question as to what will happen with this rule in 2023 and beyond. If the IRS sticks to its interpretation in the proposed regulations , if your father died after his required beginning date, you would need to take RMDs during years 3-9 of the 10-year period and empty the inherited IRA by the end of the 10th year. The annual RMDs would be calculated using your single life expectancy.

Question:

I contributed $7,000 into my Roth IRA account prior to January 8th of this year. I was 71 at the time and still working full time.  I retired on January 8th.  Reading your articles on excessive contributions, did I contribute too much money into my Roth IRA as I did not earn $7,000 for the 8 days that I did work this year?  Thank you in advance for answering this question.

PS—If I did contribute too much money, do I just take it out of my Roth IRA or is there a particular form I must file?

Answer:

The amount that you can contribute to an IRA for the year is limited to the lesser of the annual contribution limit ($7,000 in 2022 for those over age 50, or your taxable compensation. So, if you did not earn $7,000 and your spouse does not have any taxable compensation, then you will have an excess contribution in your IRA.

Removing an excess contribution requires a special procedure. You must remove the contribution and the net income attributable to it. The IRA custodian will report the withdrawal as a distribution of an excess contribution. Be sure to get this done by October 15, 2023, or you will be subject to a 6% penalty on the excess amount.

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

A REFRESHER COURSE ON MULTIPLE PLAN CONTRIBUTION LIMITS

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

As you’ve probably heard, the IRS has announced the IRA and workplace plan contribution limits for 2023. Because most of those limits are tied to inflation, many increased substantially. Among the big jumps were the elective deferral limit for 401(k) and other workplace plans from $20,500 to $22,500 and the overall limit for all plan contributions from $61,000 to $66,000.

How these two limits work and how they interact are confusing, especially if you’re in multiple plans at the same time or you change jobs in the middle of the year. Here’s a refresher course:

The elective deferral limit covers the total pre-tax and Roth contributions you make to ALL your plans in one calendar year. Those contributions are combined even if the plans are sponsored by companies that aren’t considered to be related under the tax rules. The 2023 deferral limit is $22,500, but if you’re age 50 or older by the end of the year, you can defer an additional $7,500 in “catch-up” deferrals, for a total of $30,000.

Example 1: Dwight, age 35, has a regular job with Dunder Mifflin that sponsors a 401(k) plan and also has a solo 401(k) through his beet farm side business. Dunder and the side business are unrelated entities. Even so, the most Dwight can put away between the two plans in 2023 is $22,500.

Two other important points about the elective deferral limit: After-tax (non-Roth) contributions, if allowed by the plan, don’t count towards the limit. And, if you’re eligible for both a 457(b) plan and either a 401(k) or a 403(b) plan, you can defer up to the maximum deferral limit to EACH plan.

The overall limit is sometimes referred to as the “annual additions limit” or the “415 limit.” This limit regulates the amount of ALL contributions (pre-tax deferrals, Roth contributions, after-tax (non-Roth) contributions, and employer matching and profit sharing contributions) that can be made to ANY single plan in any year. The 2023 overall limit is $66,000, or $73,500 if you make age 50 catch-up contributions.

The aggregation rules for the overall limit are tricky. Contributions made to all plans maintained by the same company are combined. That’s also the case for contributions made by two or more companies considered to be related under the tax rules. But, if you’re in two plans sponsored by companies that aren’t related, you can get the benefit of a separate overall limit for each plan.

Example 2: Since Dunder Mifflin and the beet farm (from Example 1) aren’t  related businesses, there are separate overall limits for Dwight’s two plans. Under the right circumstances and assuming he has the funds, Dwight could theoretically have as much as $66,000 in total contributions from each plan in 2023. But he would be limited to no more than $22,500 in total pre-tax deferrals and Roth contributions between the two plans.

https://www.irahelp.com/slottreport/refresher-course-multiple-plan-contribution-limits

IRA RULES THAT WE GIVE THANKS FOR IN 2022

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

It is a Thanksgiving tradition here at the Slott Report to take a moment to give thanks for the IRA rules that are helpful to retirement savers. We know there are many times the rules governing retirement accounts can be tricky. They often seem illogical, confusing, and may be even unfair. However, there are others that work well and give us the tools we need to save for a secure retirement – and may be even get a few tax breaks along the way.

Here are a few IRA rules for which we are thankful in 2022:

Roth Conversions – Roth conversions allow IRA owner to move funds from pretax to after tax. There is a tax bill, but the potentially huge payoff down the road is tax-free distributions of growth. We are grateful for this strategy that gives retirees the peace of mind that comes with not having to worry about future tax rates or the impact of taxable IRA distributions on Medicare, Social Security and other tax deductions and credits.

Bigger Contributions Allowed in 2023 – No one likes inflation, but when it comes to retirement accounts, there is one bright spot. Inflation has led to the largest cost-of-living increases to the retirement account contribution limits in a long time. While inflation is no fun, we are thankful that next year savers can put away a little more for a secure retirement. The IRA contribution limit will increase to $6,500 for those under age 50.

Catch up contributions – Time flies. Many workers see retirement looming and they feel unprepared. Older savers close to retirement can put away a little more with a catch-up contribution. Those of us over age 50 give thanks for this break. For 2023, those age 50 or over can put away an extra $1,000 for a total of $7,500 in IRA contributions.

The Sweet Spot – Everyone likes flexibility. The sweet spot is where the IRA rules give that to us, and we are thankful. Between the ages of 59 ½ and 72, not only does the 10% early distribution penalty not apply but also there are no mandatory distributions. Required minimum distributions do not start until age 72. This is a great opportunity for IRA owners to do some IRA distribution and conversion planning on their own timeline, without worries of penalties. They can do what is best for them and not Uncle Sam. For this we are grateful.

Qualified Charitable Distributions – A QCD allows an IRA owner to move funds from their IRA to charity tax-free. A QCD is a great way to get a tax break for giving if you are charitably inclined and use the standard deduction. A QCD can also satisfy an RMD. What is not to like? We are grateful for this tax break that not only helps the IRA owner but also contributes to the greater good.

 

Happy Thanksgiving from all of us at the Slott Report!

https://www.irahelp.com/slottreport/ira-rules-we-give-thanks-2022

DEADLINE FOR OPENING UP A NEW SOLO 401(K) PLAN

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

A solo 401(k) plan is a great retirement savings vehicle for self-employed business owners with no employees (other than their spouse). But if you’re considering a new solo 401(k), be aware that there’s a December 31, 2022 deadline to open up the plan if you want to make 2022 elective deferrals.

The IRS considers a business owner with a solo 401(k) to wear two hats – one as an employee and one as an employer. As an employee, you can make elective deferrals up to $20,500 for 2022, or $27,000 if age 50 or older. (Those limits will jump to $22,500/$30,000 for 2023.)  As an employer, you can also make additional contributions up to 20% of adjusted net earnings. However, there’s also an overall limit on combined elective deferrals and employer contributions. For 2022, that maximum is $61,000, or $67,500 if you defer the additional $6,500. (For 2023, those limits increase to $66,000/$73,500.) For many business owners, a solo 401(k) allows for much higher contributions than a SEP or SIMPLE IRA.

Solo 401(k) plans are also exempt from ERISA, which means that plan administration is much simpler than with a company 401(k). One negative, however, is that solo plans don’t benefit from ERISA creditor protection.

The rules for starting up new solo plans became muddled after the SECURE Act became law. Before 2020, if a company wanted to have a new plan in place for a particular tax year (say 2019), it had to formally establish the plan by the last day of that tax year (December 31, 2019). Now, businesses have extra time – until the due date for the corporate tax return, including extensions. So, for example, a business can open up a new plan for 2022 as late as September 15 or October 15, 2023, depending on the type of business.

So, what’s the problem? Well, this extended deadline is available only for employer contributions – not for elective deferrals. If you’re a sole proprietor and want to make elective deferrals for a tax year, the IRS says you must make a deferral election by the last day of that year. But you can’t make an election unless your plan has already been put into place. Translating all of this into plain English: If you want to make solo plan deferrals for 2022, you must adopt a new solo plan and make a deferral election by December 31, 2022.

What if you miss that deadline? Under the SECURE Act, you’d still have until next September or October to get a new solo plan in place. But you’d only be able to make employer contributions – not elective deferrals – for 2022.

https://www.irahelp.com/slottreport/deadline-opening-new-solo-401k-plan

INHERITED IRAS AND RMD TABLES: TODAY’S SLOTT REPORT MAILBAG

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

Question:

Hello!  I need clarification regarding RMD statements for customers who hold inherited IRAs or inherited Roth IRAs. I have not been able to find a clear answer to the following question:

Is the custodian required to provide an RMD statement to owners of inherited IRAs (or inherited Roth IRAs)?

Thank you!

Jeanne

Answer:

Jeanne,

IRA custodians are required to provide RMD statements to traditional IRA owners who must take lifetime RMDs for the year. However, they are NOT required to provide RMD statements to beneficiaries of either inherited traditional or inherited Roth IRAs. (Considering all the possible permutations for inherited IRA beneficiaries, it would be a struggle for custodians to properly report and monitor what the applicable payout rules would be for inherited accounts.) Be aware that the ultimate responsibility for calculating the proper RMD falls to the taxpayer.

Question:

I have an excel spreadsheet that I’ve been using for years to help track client RMDs. In 2020, RMDs were waived, so I just updated my spreadsheet account values and divisor, but I didn’t send RMD’s to clients. Then in 2021, I updated my spreadsheet account values and divisor and sent RMD’s out to clients. This year, however, when I look at what the IRA custodian’s website shows to be my client’s RMD, their website RMD amount doesn’t match up with my spreadsheet. What I am getting at is, am I supposed to keep using the old Uniform Lifetime Table for these clients or some new RMD table? My understanding is that the new RMD tables are for those who turn age 72 and for those who inherited IRA and Roth IRA accounts having to use the 10-year rule going forward. Please help me figure out which RMD table I should be using.

Thank you so much!

Answer:

The new tables apply to ALL accounts. You can disregard the old tables, and you will need to update your entire spreadsheet. For lifetime RMDs, it is easy. Just use the new Uniform Lifetime Table for 2022 and all future years. For inherited accounts there is a little more legwork. You will have to go back to the first year when RMDs applied. Find the age of the inherited IRA owner in that first year, overlay the NEW Single Life Expectancy Table to determine the factor that first year, then subtract 1 for each year until 2022. This will give you the proper factor for 2022, and you can continue to subtract 1 for each year going forward.

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

NUA – TRIGGER ACTIVATORS!

By Andy Ives, CFP®, AIF®
IRA Analyst

The goal of the net unrealized appreciation (NUA) tax strategy is to enable a person to pay taxes on the appreciation of company stock formerly in a work plan at long term capital gain rates as opposed to ordinary income rates. The spread between long term capital gains vs. ordinary income could result in a sizable tax savings for those eligible for the strategy. However, not everyone can participate, and for those who are candidates for NUA, there are potential stumbling blocks along the way.

Without getting too deep into the NUA weeds, if a person has significant appreciation in  company stock held in a workplace plan like a 401(k), and if that person hits a particular trigger event, then NUA could be in the cards. (Note that “significant appreciation” is subjective.) Those trigger event are turning age 59 ½, separation from service (not for the self-employed); disability (only for the self-employed), and death.

Once a trigger is hit, an imaginary “NUA eligibility light” is turned on. The account holder does not have to proceed with the NUA strategy immediately. The light will stay on until the trigger is activated. This is where account owners need to tread carefully. A wrong turn or innocent transaction could unintentionally activate the trigger. And if the activated trigger is not addressed by year end, it will be forever lost.

As 2022 comes to a close, it is vitally important for anyone considering the NUA tax strategy who has hit a trigger event to determine whether they have activated that trigger with any subsequent transaction. Here are a few common “trigger activators” that will start your NUA light to flash and require immediate attention if you wish to capitalize on NUA this year.

In-Service Distributions. Do you have access to in-service distributions from your work plan? If you hit an NUA trigger and were planning on leveraging the strategy at some point in the future, a subsequent in-service distribution will activate the trigger and require the NUA process to be completed in that same calendar year. Did you take a distribution to fund a family vacation? To buy a boat? To do anything at all? If so, your NUA trigger will be activated and flashing.

Required Minimum Distributions (RMDs). If you hit an NUA trigger a few years ago and made a concerted effort to avoid activation until you were ready to move forward with the NUA strategy – good for you! But now you are 72. Did the plan automatically send you your first RMD? Trigger activated! Time to act!

72(t) Distributions. Have you been taking consistent 72(t) payments from your work plan? (While rare from a plan, they do exist.) Like RMDs and in-service distributions, 72(t) payments from a plan will activate an NUA trigger just the same.

In-Plan Roth Conversions. Yes, even in-plan Roth conversions can activate an NUA trigger.

For anyone who has hit a trigger event and intends to leverage NUA in a future year, it is imperative to ensure your trigger has not been inadvertently activated. Otherwise, if you fail to act immediately, the trigger (and NUA tax strategy) could be squandered.

https://www.irahelp.com/slottreport/nua-%E2%80%93-trigger-activators

4 THINGS WE ARE TALKING ABOUT AT THE SLOTT REPORT AT THE END OF 2022

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

The holidays are right around the corner, and 2022 is drawing to a close. The end of the year is always a busy time with retirement account deadlines and preparations for the arrival of a new year and the tax season. This year, it seems, has been even busier than usual for us. Here are four things we are talking about at the Slott Report during the final few months of 2022.

1. Getting a jump on year-end deadlines. December 31 is an important deadline for retirement accounts. Many IRA owners need to take their 2022 RMD by that date. Those planning to take advantage of historically low tax rates and convert to Roth IRAs also have an end-of-the-year deadline. Anyone looking to use the Net Unrealized Appreciation (NUA) strategy in 2022 must get their lump sum distribution done by December 31, 2022.

What we are hearing is that getting these transactions done before the last minute is more important than ever. Many financial institutions have internal deadlines for year-end transactions that fall way before December 31. Also, the holidays and persistent staffing problems will likely be hurdles to getting things done in the final days of the year.

Getting ahead of the game and completing these transactions now instead of later is on everyone’s minds.

2. Confusion over IRS SECURE Act regulations. In February, the IRS released the long awaited proposed SECURE Act, and confusion ensued. The IRS took the unexpected position that RMDs would be required during the 10-year period for some beneficiaries of inherited IRAs. This surprise interpretation of the SECURE Act created uncertainty and the IRS had to step in with guidance. Notice 2022-53 provides some temporary relief for these beneficiaries by waiving the 50 % penalty for them for 2021 and 2022 RMDs.

As the year ends, we are hearing from those grateful for the reprieve for this year but wondering what next year will bring. IRS has not given any clear signals of what they will do in the future. We will be waiting for final SECURE Act regulations, which will hopefully give us some answers.

3. The fate of SECURE 2.0. We have been watching the proposed legislation called SECURE 2.0 as it makes its way through Congress. This follow up to the SECURE Act would make many more changes to the retirement account rules, including raising the RMD age and expanding Roth accounts. The proposal has broad bipartisan support. Will it pass this year in the lame duck session? No one really knows but there has been a lot of speculation.

As 2022 draws to a close we at the Slott Report will continue to watch any developments in Washington closely and keep you up to date on any changes.

4. Big Cost of Living Adjustments (COLAs) ahead in 2023 for retirement accounts. The release of the COLAs for the next year by the IRS is usually pretty routine. However, the 2023 COLAs for retirement accounts got us talking because they are much larger than usual. The IRA contribution limit will rise after being the same for several years. Also, the limits for employer plans are going way up.

At the Slott Report, we believe in making lemonade out of lemons. While inflation usually is bad news, the COLAs for retirement accounts offer more opportunities to save in 2023. Also, the large inflation adjustments to the tax brackets for 2023 may open the door to converting more funds to Roth IRAs at lower tax rates.

https://www.irahelp.com/slottreport/4-things-we-are-talking-about-slott-report-end-2022

ONCE-PER-YEAR ROLLOVERS AND RMDS FOR INHERITED IRAS: TODAY’S SLOTT REPORT MAILBAG

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

Question:

Good morning,

I have a client who took out $100K from his SEP IRA and put the funds back in on 8/19/22 — within 60 days from the distribution. The client has now called me and asked if he can take the same $100K out and move it to his Roth IRA and pay taxes on it. Is he allowed to do this, or do we have to wait until 2023 to do the conversion?

Frank

Answer:

Hi Frank,

This is an area that can be a little tricky. The once-per-year rollover rule says that only one distribution from an individual’s IRAs can be rolled over within a 356-day period. It applies on a 365-day basis starting with the day a distribution is received and not on a calendar-year basis.

The rule applies to rollovers from a traditional IRA (or SEP or SIMPLE IRA) to another traditional IRA (or SEP or SIMPLE IRA) and rollovers from a Roth IRA to another Roth IRA.. The once-per year rollover rule, however, does not apply to conversions. Therefore, the rollover that the client did back in August 2022 will not prevent him from doing a conversion later this year.

Question:

Ed & Company,

With the newest interpretation of the SECURE Act, it still seems unclear if a beneficiary must take an annual RMD on an inherited Roth. I’ve seen conflicting commentary on both sides of the issue, including from Fidelity (as custodian of the account).  Has there been any additional insight as to what the IRS is thinking here – is it just empty by the end of the 10th year or does a beneficiary who inherited in 2021 have to take something in 2022?

Thanks.

Sharon

Answer:

The SECURE Act and the IRS proposed RMD regulations that followed it have created a ton of confusion. However, one rule is clear. If a Roth IRA is inherited by a non-eligible designated beneficiary, no RMDs are required during the 10-year period. That is because RMDs are only necessary during the 10-year period when the IRA owner died on or after the RMD required beginning date, and all Roth IRA owners are considered to have died before their required beginning date. No RMD would be required for 2022 or any other year during the 10-year period.

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

HOW ARE 2023 RMDS CALCULATED FOR BENEFICIARIES WHO GOT RMD RELIEF ?

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

As we’ve reported, the IRS recently said it would waive the 50% penalty on RMDs missed in 2021 and 2022 for IRA beneficiaries subject to the 10-year payout rule who inherited in 2020 or 2021.

These waivers were announced in IRS Notice 2022-53. Although the Notice is not clear, it appears that beneficiaries are not required to take RMDs for years that the penalty waiver applies to. However, as things stand now, the grace period will end in 2023. So, even beneficiaries who benefitted from the IRS’s generosity will be subject to the 50% penalty if they don’t take their 2023 RMD by 12/31/23.

How will the 2023 RMD (and future RMDs) be calculated if the beneficiary didn’t take annual RMDs for 2021 and 2022 (for a 2020 death) or for 2022 (for a 2021 death)? First, the 10-year payout period remains the same, meaning it will still end on 12/31 of the year of the 10-year anniversary of the original IRA owner’s death. Second, the 2023 RMD will be determined using a life expectancy as if the RMD for 2021 and 2022 were taken – even if they weren’t.

Here’s an example: Aaron died in 2020 at age 82 and left his traditional IRA to his daughter Zoey, age 55. Zoey is a non-eligible designated beneficiary, so she is subject to the 10-year payout rule. Aaron died after his RMD required beginning date. Without the recent IRS guidance, Zoey would have been subject to a 50% penalty if she didn’t receive an RMD for 2021 (the 1st  year of her 10-year payout period) and a penalty if she doesn’t take her 2022 RMD (the 2nd year of her 10-year term).

Assume that Zoey doesn’t take RMDs for either 2021 or 2022. Zoey’s 10-year payout period remains the same, so she must still empty the inherited IRA 12/31/30. And, she must receive annual RMDs for years 3-9 of the 10-year period starting in 2023. The 2023 RMD will be calculated as if she did take the 2021 and 2022 RMDs. The 2021 RMD would have been the 12/31/20 balance of the inherited IRA divided by 28.7 – the life expectancy of a 56-year old under the old IRS Single Life Expectancy Table. The 2022 RMD would have been the 12/31/21 account balance divided by 29.6. The 29.6 is arrived at by “resetting” the life expectancy (determining the life expectancy of a 56-year old under the new IRS Single Life Expectancy Table (30.6) and subtracting one from that).

So, Zoey’s 2023 RMD will be the 12/31/22 IRA balance divided by 28.6, the life expectancy that would have applied for 2022, subtracted by one. For 2024, a 27.6 life expectancy will be used, and so on. The fact that Zoey chose not to take RMDs for 2021 and 2022 is simply ignored.

Of course, all of this could change when the IRS issues final RMD regulations. We’ll keep you posted.

https://www.irahelp.com/slottreport/how-are-2023-rmds-calculated-beneficiaries-who-got-rmd-relief

IRA TRANSACTIONS THAT CAN BE MISSED

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

Not every IRA transaction is easily identifiable. Some require a little legwork to reveal or report what occurred. Some transactions are not even labeled on official IRS tax forms and can go undetected. Here are three items that taxpayers and tax professionals alike can easily miss.

1. Qualified Charitable Distributions (QCDs) NOT Reported on 1099-R. IRA custodians will not separately report a QCD. There is no code or box on the 1099-R to identify a QCD. It is up to the taxpayer to let the IRS know about the donation by including the information on the tax return. Since there is no 1099-R reporting code, tax preparers/CPAs must be alerted. QCDs can easily be missed on a tax return, resulting in an erroneous taxable IRA distribution.

The lack of a QCD code on the 1099-R is intentional. This is not an oversight by the IRS, and is most likely a welcome relief for custodians. Why? Because an IRA custodian does not have first-hand knowledge of whether a particular distribution meets all the QCD conditions. Is it a qualifying charity? Did the person already max out the $100K QCD limit from another IRA at another firm? Custodians do not want to police any of these details.

2. Tracking Roth IRA Contributions and Roth Conversions. IRS Form 5498 contains a bevy of information, including a definitive date for every Roth contribution and conversion.

Box 3 – Roth conversions. Until a person is age 59 ½, every Roth IRA conversion will carry its own 5-year clock to determine whether distributions of the converted amounts are subject to the 10% early distribution penalty. It is all recorded on the annual Form 5498. A Roth conversion is essentially time-stamped January 1 for the year listed on the form. Add five years and a Roth IRA owner will know exactly when those Roth conversion dollars are available penalty-free.

Box 10 – Roth IRA contributions. Roth contributions are also time-stamped on a 5498. Technically, there is no place on a 1040 to report a Roth contribution. So how does the IRS know when a person opened his first Roth IRA and set the “5-year forever clock” in motion for distributions of tax-free earnings? See Form 5498.

3. Forgetting to File 8606 to Claim Basis (After-Tax Contributions). How do you tell the IRS that an IRA distribution or Roth conversion is not taxable? After all, the IRS will treat it as ordinary income unless there is evidence that it should not be taxed. The answer is IRS Form 8606. IRA custodians do NOT keep track of after-tax contributions – even if you tell them that the funds are after-tax or keep the after-tax dollars in a separate IRA. Custodians have no way of knowing what a person claims on his tax return, so they have no way of knowing if a deduction for an IRA contribution was taken or not.

Any time an after-tax contribution is made to an IRA, IRS Form 8606 must be filed. This is essentially the client waving a flag and declaring, “I have after-tax funds in my IRA!” Without this form, the IRS will assume that any funds distributed from the IRA (or converted to a Roth IRA) are taxable.

Be careful not to overlook any of these all-important items!

https://www.irahelp.com/slottreport/ira-transactions-can-be-missed

THE REQUIRED BEGINNING DATE IS NOW A “REALLY BIG DEAL”

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

When it comes to IRAs and workplace plans, the concept of the “required  beginning date” (RBD) is a “really big deal” again.

The RBD is the first date you’re required to start required minimum distributions (RMDs). For traditional IRAs, the RBD is April 1 of the year following the year you turn age 72. (But if you were born before July 1, 1949, your RBD was April 1 of the year after the year you turned 70 ½.) There are no lifetime RMDs for Roth IRA owners, so they are always considered to have died before the RBD with respect to their Roth IRAs.

Most company plans allow you to delay your RMD until April 1 of the year following the year you retire if you work past age 72. However, this rule (called the “still-working exception”) isn’t available if you own more than 5% of the company sponsoring the plan.

It’s important to remember that choosing to take your first RMD before the next April 1 doesn’t accelerate your RBD.

The SECURE Act completely changed the RMD rules for inherited IRAs and company plan accounts. With the new law, most people believed it no longer mattered whether the original IRA owner died before or after the RBD. The new law clearly requires most beneficiaries, except for spouses and certain other “eligible designated beneficiaries,” to empty the inherited account within 10 years after death. (The life expectancy stretch is still available for those EDBs.) However, like the old 5-year rule, it appeared that annual RMDs were not required during that 10-year period.

But the IRS saw it differently. In proposed regulations issued February 23, 2022, the Service called attention to an old RMD rule called the “at-least-as-rapidly” rule and said that the SECURE Act did not do away with that rule. The at-least-as-rapidly rule says that once a retirement plan owner begins receiving RMDs, RMDs must continue after the owner’s death.

 

This means that when an individual beneficiary (other than an EDB) inherits after 2019, different RMD rules are in place depending on when the original account owner died. If death occurred before the RDB, the 10-year rule applies, but annual RMDs aren’t required during the 10-year period. However, if death occurred on or after the RBD, the 10-year applies and the beneficiary must take annual RMDs in years 1-9 of the 10-year period (because of the at-least-as-rapidly rule). Those annual RMDs are based on the beneficiary’s single life expectancy factor under the IRS Single Life Expectancy Table.

 

Subsequent to the February regulations, the IRS received significant pushback to the RMD rule for deaths on or after the RBD. In response, the IRS announced on October 7 that it will waive penalties on missed 2021 and 2022 RMDs for the first two years of the 10-year period for beneficiaries who inherited in 2020. It also will waive penalties on missed 2022 RMDs for the first year of the 10-year period for beneficiaries who inherited in 2021.

https://www.irahelp.com/slottreport/required-beginning-date-now-%E2%80%9Creally-big-deal%E2%80%9D

RMD AGGREGATION RULES AND APPRAISALS FOR RMDS: TODAY’S SLOTT REPORT MAILBAG

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

Question:

I am 72 and want to start RMDs. I have multiple accounts from teaching jobs that I had many years ago, plus a couple of traditional IRAs and a 401(k) with my current employer. Can I total all of these up as of December 31, 2021 and take an RMD based on that number, or does each account have an RMD based on its value?

Thank you for your help,

John

Answer:

Dear John,

The RMD rules for aggregating retirement plan accounts are tricky. All of your traditional IRAs can be aggregated with each other, but not with your 403(b)s (from your previous teaching jobs) or your 401(k). This means that RMDs for each IRA account must be calculated separately, but the total RMD may be taken from one (or more) IRA account. Your multiple 403(b) accounts can also be aggregated with each other, but not with your IRAs or 401(k). If your 401(k) plan uses the “still-working exception,” you don’t have to take RMDs from that plan until you retire. At that point, the RMD for your 401(k) must be calculated separately and taken apart from your IRAs and 403(b)s. Considering all these moving parts, it might be wise to consider consolidation to minimize future RMD hassles.

Question:

I have a client that owns a business in his IRA. When he turns 72, how is his RMD calculated? Does he need to value/appraise the business each December to determine the next year’s RMD amount? Thanks!

Answer:

Yes, he must obtain an annual appraisal of the business to determine each year’s RMD. The business must be appraised annually in order for the IRA custodian to report it to the IRS each year on Form 5498. The appraisal must be independent and legitimate so it can withhold scrutiny from the IRS if challenged.

https://www.irahelp.com/slottreport/rmd-aggregation-rules-and-appraisals-rmds-today%E2%80%99s-slott-report-mailbag

A TAX-FREE ROTH IRA DISTRIBUTION IN 5 EASY STEPS

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

Roth IRAs offer a trade-off where you pay taxes now on your contribution (or conversion) in exchange for tax-free earnings later. Don’t miss out on tax-free Roth IRA distributions by making mistakes. Here are five steps to follow to make sure money comes out of your Roth IRA tax-free.

Step 1. Aggregate your Roth IRAs. For tax purposes, all of your Roth IRAs are considered one Roth account. There is no tax benefit gained by keeping conversions in a separate Roth IRA from your contributions. This is sometimes called the aggregation rule.

Step 2. Follow the ordering rules. Funds leave your Roth IRAs in a certain order. Contributed amounts are distributed first. Converted amounts are distributed next, first in, first out. Last out would be earnings.

Step 3. Remember, contributions are always available tax- and penalty-free. Not only do your contributions come out first, in addition, they are always available tax- and penalty-free. This means that if you need to tap your Roth IRA, you can easily access contributions without adverse tax consequences, regardless of your age or how long you had the Roth IRA for.

Step 4. Avoid penalties on converted funds. Converted funds are always distributed tax-free. This makes sense since you already paid taxes when you converted them. However, amounts that were taxable at conversion may be subject to the 10% early distribution penalty if you are under the age of 59½ at the time of the distribution and the conversion was less than five years ago. This five-year clock begins separately for each conversion you do. What if you are over age 59 ½ when you take converted dollars (not earnings) from your Roth IRA? Then, you have no worries about this five-year clock.

Step 5. Aim for qualified distributions of earnings. Earnings are not subject to tax if the distribution is a qualified distribution. Your distribution is qualified if it is made after you have owned any Roth IRA account for five years AND you are over the age of 59½, or are dead, or disabled, or taking the funds for a first-time home purchase.

The five-year period for qualified distributions of earnings can be confusing. It is different than the five-year period for penalty-free distributions of converted funds discussed above. It does not re-start with each Roth IRA contribution or conversion. If you contributed $1 dollar to your Roth IRA for 2017, and then in 2020 you converted your one-million-dollar traditional IRA to the Roth IRA, then as of January 1, 2022, all the Roth money would be considered to have been held for five years for purposes of determining qualified distributions of earnings. Your Roth IRA 5-year clock began on the first day of the year for which the first dollar of Roth contributions was made.

https://www.irahelp.com/slottreport/tax-free-roth-ira-distribution-5-easy-steps

THE CLOCK IS TICKING ON 2022 CONVERSIONS

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

Fall is in full swing now with football, foliage, and pumpkin spice everything. The holiday season is just around the corner. Before we know it, the year 2022 will come to an end. If you are considering converting an IRA to a Roth IRA in 2022, the clock is ticking. Here is what you need to know when making this decision:
December 31, 2022 Deadline

The deadline for 2022 conversion is the end of the calendar year. There is a common misconception that a conversion can be done up until the client’s tax-filing deadline. That is NOT the case. There is no such thing as prior year conversion. The distribution must be taken in 2022 and reported on a 2022 Form 1099-R. It is best not to wait until the last minute. Be sure to leave enough time to get the transaction done.
Trading a Tax Bill Now for Tax-Free Gains Later

If you convert your traditional IRA to a Roth IRA in 2022, your pretax traditional IRA funds will be included in your income for 2022. This will increase your 2022 income which may impact deductions, credits, exemptions, phase-outs, the taxation of your social security benefits, and Medicare Part B and Part D premiums; in other words, anything on your tax return impacted by an increase in your income. That is a tax hit for sure, but keep it in perspective. Remember, the extra income would only be for 2022, the year of the conversion. The trade-off is the big tax benefit down the road. If you follow the rules for qualified Roth IRA distributions, all your Roth IRA funds, including the earnings, will be tax-free when distributed to you.

Tax rates are historically low, but these rates will not be here forever. There is a window of opportunity to take advantage of them. The lower tax rates are temporary and scheduled to sunset in a few years. While no one can say for sure what the future will bring, the federal government’s large deficits make much higher future tax rates a likely possibility. Converting now is a way to lock in the low rates of 2022 and avoid worries about the uncertainty of future taxes.
Good Advice is a Must

The decision on whether to convert your traditional IRA to a Roth IRA in 2022 is a big one. There is not one answer for everybody. Conversion is definitely not a one-size-fits-all proposition.

Recharacterization of Roth IRA conversions no longer available. This means you will need to be sure that conversion is the right move for you because there is no way to undo the transaction. Your 2022 conversion will be irrevocable.

Not sure what is right for you? Consulting with a knowledgeable tax or financial professional is a great place to start.

https://www.irahelp.com/slottreport/clock-ticking-2022-conversions

RMDS AND ROTH IRA 5-YEAR RULE: TODAY’S SLOTT REPORT MAILBAG

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

QUESTION:

Iturn 72 next month.  Can I take part of my RMD this year and the balance before April of next year?

Howard

ANSWER:

Howard,

Happy early birthday! Since you turn 72 this year, 2022 is your first year for taking a required minimum distribution (RMD). With the first RMD, you have until April 1 of the year after the year you turn 72 to take all or part of the first RMD. So, if you want to take part of your 2022 RMD this year and the balance by April 1, 2023, you are welcome to do so. (Just remember that you will have to take your 2023 RMD and all future RMDs by December 31.)

QUESTION:

Dear Roth IRA experts,

I have a Roth IRA question and seeking your expertise! My question has to do with the Roth IRA 5-year rule. I am over age 59 1/2. I have a Roth IRA, created with Roth contributions started in 2015. This Roth IRA meets the 5-year rule. I have a Roth 401(k), created by converting pre-tax funds to a Roth IRA annually, which was started in 2018. I want to rollover my Roth 401(k) into a second Roth IRA (custodian different than custodian for first Roth IRA). Will the withdrawals from a newly established, second Roth IRA – principal and earnings – be tax and penalty free?

Thank you so much!

Roger

ANSWER:

Roger,

Even though you are just a couple of months short of meeting the 5-year clock on your Roth 401(k), you will have full access to all Roth IRA dollars after the rollover. If you roll the Roth 401(k) to a brand-new Roth IRA before the end of 2022, those former plan dollars will maintain the same character as they were in the plan (conversions and earnings) when they go into the Roth IRA. However, they will adopt the clock of your existing Roth IRA. (Since you started your first Roth IRA in 2015, that start date will apply to all your Roth IRAs, regardless of how many you have.) Since you already met the 5-year clock on your first Roth IRA and are 59 ½ or older, you have immediate access to all Roth IRA contributions, conversions and earnings tax-free. (It might behoove you to wait until January before doing the rollover. This way it will be a “qualified distribution” from the plan, and you can avoid any possible confusion of sorting out what was plan conversion dollars and what was earnings.)

https://www.irahelp.com/slottreport/rmds-and-roth-ira-5-year-rule-todays-slott-report-mailbag

THE LAS VEGAS CONFERENCE

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

The Ed Slott team hosted a highly successful training program for members of Ed Slott’s Elite IRA Advisor Group℠ and Ed Slott’s Master Elite Advisor Group℠ last week in Las Vegas. Over 300 financial advisors from across the country attended. Feedback on the educational material provided was positive, with one attendee saying he “never felt more empowered” in his 18-year career. Topics of conversation over the two-and-a-half-day program ran from IRS Notice 2022-53 (which waived the penalty for 2021 and 2022 RMDs within the 10-year period) to net unrealized appreciation to QCD substantiation requirements. Here are a handful of other topics that garnered significant discussion.

 

Excess IRA Contributions. While the cap on IRA and Roth IRA contributions will move from $6,000 to $6,500 in 2023 for those with earned income, IRA owners are sure to erroneously exceed the limit. Reasons for making an excess contribution are far and wide. Maybe a person contributed to a Roth IRA thinking they were under the income phase-out limit, but then earned a large year-end bonus that pushed them over the limit. Maybe they contributed to a traditional IRA but failed to realize the contribution could not be deducted based on their income and participation in a company work plan. Maybe the IRA owner rolled over dollars (like a required minimum distribution) that was not permitted to be rolled over.

 

Regardless of the reason why the excess was made, corrective action must be taken. During the conference, all possibilities and options for fixing the error were discussed. The excess contribution could be recharacterized to a different type of IRA, i.e., from Roth to traditional, or vice versa. The excess could be carried forward to a subsequent tax year, or the excess could be removed. Whether or not the 6% penalty applied, whether IRS From 5329 was necessary to be filed, and how to handle any earnings on the excess contribution was also covered.

 

Roth 401(k) to Roth IRA Rollovers. This remains the shortest question with the longest answer: “What considerations must be made when rolling a Roth 401(k) to a Roth IRA?” We could have spent a half day of the conference discussing the applicable factors in this transaction alone. How old is the account owner? How long has he held the Roth 401(k)? Does he have a Roth IRA? How long has that Roth IRA been in existence? Each of these questions requires a response. Each response leads down a different path. Only after contemplating the answers can a proper decision be made. The Roth 401(k) distribution will either be qualified or not. This will directly impact whether the account owner will have penalty- and tax-free access to the dollars after the rollover to the Roth IRA. (And this doesn’t even approach the necessary conversation about other reasons to potentially leave plan dollars in a plan or roll them to an IRA.)

 

Mistakes That Can Be Fixed. In addition to excess contributions, we covered a laundry list of over 30 retirement account mistakes that can be fixed. This included items such as trust beneficiary problems, 60-day rollover errors, 1099-R coding questions, missed RMDs and “bad” beneficiaries. Likewise, a list of dreaded “fatal errors” was presented. These are mistakes where there is no going back, no fix, no do-over. Roth conversions, prohibited activity and many other “unfixable” transactions fall into this category.

 

The message was clear: IRA and retirement account regulations are complicated. Be sure to work with an advisor who can navigate the incredibly complex rules and their permutations.

https://www.irahelp.com/slottreport/las-vegas-conference

IRA ROLLOVERS AND 2021 RMDS: TODAY’S SLOTT REPORT MAILBAG

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

Question:

Can an IRA to Roth IRA rollover be spread out over two transactions to soften the upfront tax hit?

Answer:

When a conversion is done, any taxes owed would be owed in the year of the conversion. There is no way to spread that income over more than one tax year. However, one possible strategy to minimize the tax bite of converting is to do partial conversions. There is no rule that says the entire traditional IRA must be converted in one year. Many times, people do not want to pay the taxes on a Roth conversion in a tax bracket that is higher than their normal tax bracket. In those cases, a series of small Roth conversions done year after year could be the answer. You fill up low tax brackets with amounts converted to a Roth IRA.

Question:

Hello, I recall your discussion of what the requirement will be for taking 2021 RMDs during the 10-year rule for IRAs inherited in 2020 from owners who had reached their RBD prior to death. Has there been a determination on this question?

Thank you,

Mike Otto

Answer:

Hi Mike,

In Notice 2022-53, issued on October 7, the IRS waived the 50% penalty for beneficiaries subject to the 10-year rule under the SECURE Act who do not take 2021 or 2022 required minimum distributions (RMDs) from an inherited IRA. You can find all the details in the Slott Report at  https://www.irahelp.com/slottreport/irs-waives-50-penalty-missed-2021-and-2022-rmds-within-10-year-period

https://www.irahelp.com/slottreport/ira-rollovers-and-2021-rmds-todays-slott-report-mailbag

A CLEAR EXPLANATION OF THE RBD

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

SECURE Act regulations shoved the required beginning date (RBD) to the front of the stage. No longer can the RBD hide from the bright lights. What was once somewhat of a minor date in people’s lives has blossomed into an important event with cascading impacts on generations of potential beneficiaries. Death in relation to the RBD now impacts whether required minimum distributions (RMDs) are required within the 10-year payout rule for beneficiaries. Additionally, and what has always been the case, the RBD defines when lifetime RMDs are to begin for the original account owner and whether or not beneficiaries need to take a year-of-death RMD.

Despite its importance, the RBD and its impact on both lifetime and post-death RMDs remains a confusing topic. Questions abound from both financial advisors and the public. To clarify the subject, I lean on two examples and introductory commentary to clearly explain the RBD:

The RBD is a definitive line in the sand: April 1 of the year after the year a person turns 72. It is NOT the year you turn 72. It is NOT the end of that year. There is nothing nebulous about it. April 1 of the year after the year you turn 72 is a clear black circle on the calendar. A person can either die before this precise date, or they can die on or after this date. And when they die decides if RMDs apply.

Example 1: Carol is proactive. She likes to get things done and off her to-do list. Carol turned 72 in January of this year. She knows that this year is her first RMD year and, if she chose, she could have delayed her first RMD until her RBD – April 1 of next year. But Carol never delays anything. She promptly took her IRA RMD after her birthday in January. Good job, Carol! Now it is autumn…and Carol gets hit by a bus and dies.

Question: What was that distribution Carol took back in January? She took a withdrawal in anticipation of reaching her RBD, but she never reached that date. In fact, since Carol died before her RBD, the distribution she took from her IRA in January was just a voluntary withdrawal that did not need to be taken. (But Carol didn’t know that at the time.)

Example 2: Sam is oblivious. He does not pay attention to his finances and has never heard of an RMD or an RBD. Sam also turned 72 in January. Sam does not take a distribution from his IRA. By the end of 2022 Sam has still not taken any distributions. Now it is January of 2023 and Sam turns 73. Sam does not touch his IRA. Now it is late March in 2023 and Sam has an appointment with his financial advisor. The advisor tells Sam that since he turned 72 last January, he now needs to take two RMDs in 2023. Sam panics, has a heart attack, and dies right there in the advisor’s office.

Questions: Does Sam have a missed RMD situation? Do Sam’s IRA beneficiaries need to concern themselves with taking a year-of-death RMD? We do NOT have a missed RMD situation, and Sam’s IRA beneficiaries do NOT have to worry about a year-of-death RMD. Like Carol in Example 1, Sam is considered to have died before his RBD. Since Sam never made it to that circled date on the calendar, RMDs never applied to his IRA.

The first RMD is taken in anticipation of reaching the RBD. However, one must then make it to the RBD to, in fact, officially initiate required minimum distributions.

https://www.irahelp.com/slottreport/clear-explanation-rbd

ELIGIBLE DESIGNATED BENEFICIARIES AND DISTRIBUTIONS OF ROTH CONVERSIONS: TODAY’S SLOTT REPORT MAILBAG

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

Question:

Hello,

I inherited an IRA from my brother who passed away on January 6, 2022. His DOB was 12/31/1952. He had just turned age 69. I am 75 years old. My DOB is 6/26/1947.

I understand the rules have changed regarding inherited RMDs recently, and some accounts need to be depleted within a 10-year period. I watched a video recently on YouTube that said there were some exceptions to the rule. One exception is that you could use the stretch rule (meaning your life expectancy) if the beneficiary is not more than 10 years younger. I am 5½ years older than my brother. Would that stretch rule apply to me?

Thank you.

Answer:

Yes, it would. The SECURE Act requires that most individual beneficiaries who inherit a retirement account after 2019 empty the account by 12/31 of the 10th year following the year of death. But, as you note, certain beneficiaries, called “eligible designated beneficiaries” or “EDBs,” can still stretch out required minimum distributions (RMDs) over their single life expectancy. EDBs include a beneficiary who is not more than 10 years younger than the deceased IRA owner – or (like you) is older than the deceased owner.

Question:

Good day, sir. I hope all is well. I have taken your seminars and found them totally enlightening.

I am confused on the rules on an IRA conversion and the 5-year holding period. If an IRA was converted to a Roth IRA at age 57, I thought the 5-year rule meant you could not take your principal out on a conversion without paying the 10 percent penalty (of course, the principal would be income tax free). But if you take it out in three years, when age 60, would you still owe the 10% penalty, or is that waived because you are over age 59½?

Thank you.

Todd

Answer:

Hi Todd,

Thank you for the nice compliment!

At age 60, the 10% penalty is waived. Converted amounts can always be distributed penalty-free at or after age 59½ regardless of whether the 5-year holding period has been satisfied. But if the converted amounts are withdrawn before age 59½, then the 5-year conversion clock must be met to avoid the 10% penalty. The 5-year holding period begins on January 1 of the year the conversion was done, and there is a separate holding period for each conversion.

https://www.irahelp.com/slottreport/eligible-designated-beneficiaries-and-distributions-roth-conversions-today%E2%80%99s-slott

IRS PROVIDES SOME RELIEF FOR VICTIMS OF HURRICANE IAN

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

If you are a victim of Hurricane Ian, you may be eligible for some relief when it comes to your retirement accounts.

The IRS has postponed certain tax deadlines for individuals affected by Hurricane Ian until February 15, 2023. Some of these postponed deadlines apply to retirement accounts. For example, the relief includes more time to complete certain acts such as IRA rollovers or recharacterizations, correction of certain excesses and making contributions.

For more information about who can qualify for the extended deadlines, check the Hurricane Ian page on the IRS website.

While the IRS can grant some tax relief to those affected by Hurricane Ian, its ability to do so is limited. There is some relief that the IRS does not have the power to give. For example, it cannot exempt early retirement account distributions from the 10% penalty. Such a change would require a change in the law and can only be made by Congress.

Congress has passed such legislation in the past for certain victims of Hurricanes Harvey, Irma, and Maria and the California wildfires. Similar legislation was also passed back in 2005 to help the victims of Hurricane Katrina and in 2020 for persons affected by COVID-19.

However, legislation giving retirement account relief to disaster victims is not always a sure thing. Congress gave no such relief to victims of Hurricane Sandy in 2012. Similar proposed legislation for victims of the superstorm that struck the northeast stalled in Congress and failed to become law when some members from the south and the midwest objected, citing budget concerns.
There have been several proposals to make penalty-free disaster distributions a permanent part of the tax code. For example, the bipartisan Disaster Retirement Savings Act proposed in 2021 included provisions granting relief from the 10% penalty. These provisions would be triggered automatically if the President issues a federal disaster declaration. These proposals may gain some traction in Congress and could be part of a larger retirement package that may come later this year, which is often referred to as SECURE 2.0.

https://www.irahelp.com/slottreport/irs-provides-some-relief-victims-hurricane-ian

IRS WAIVES 50% PENALTY FOR MISSED 2021 AND 2022 RMDS WITHIN THE 10-YEAR PERIOD

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

Last Friday (October 7, 2022), the IRS waived the 50% penalty on missed 2021 and 2022 inherited retirement account RMDs for beneficiaries subject to the SECURE Act 10-year payout period. The guidance was in IRS Notice 2022-53.

The Notice says the IRS will not impose the penalty for missed 2021 or 2022 RMDs within the 10-year period if the account owner died in 2020 on or after his required beginning date with a beneficiary who is not an eligible designated beneficiary (“EDB”). (The “required beginning date” is April 1 of the year after the year the IRA owner turns 72.) The IRS also will not impose a penalty for a missed 2022 RMD within the 10-year period by a beneficiary who is not an EDB, if the account owner died in 2021 on or after his required beginning date.

The IRS says that a penalty on missed RMDs within the 10-year term will not be imposed until 2023 at the earliest. If a beneficiary already paid the penalty for a missed 2021 RMD, the beneficiary can request a refund from the IRS.

Although the Notice is not clear, it appears that, since the penalty is waived, the missed RMDs do not have to be taken at all.

It is important to note that the Notice does not affect lifetime RMDs, inherited IRAs by EDBs or RMDs by beneficiaries who inherited before 2020.

As background, the SECURE Act imposed a 10-year payout rule for an individual beneficiary who is not an EDB and who inherits after 2019. That rule requires that a non-EDB empty the retirement account by the end of the 10th year following the year the account owner died.

On February 23, 2022, the IRS issued proposed regulations that said that, if the account died on or after his required beginning date, a non-EDB would be subject to the 10-year rule AND would be required to take annual RMDs during years 1-9 of the 10-year period. That interpretation surprised most commentators who thought the 10-year rule would apply like the pre-SECURE Act 5-year rule, which did not require annual RMDs.

In Notice 2002-53, the IRS said it received a number of comments indicating that it would be unfair to apply the annual RMD requirement when an account holder died in 2020, since the non-EDB would not have known that an RMD was required in 2021.

The Notice also gives relief to beneficiaries of an EDB who died in 2020 or 2021 while taking annual RMDs.

https://www.irahelp.com/slottreport/irs-waives-50-penalty-missed-2021-and-2022-rmds-within-10-year-period

RMDS AND INHERITED IRAS: TODAY’S SLOTT REPORT MAILBAG

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

Question:

I must take an RMD this year, based on 12/31/2021 account values. My current account values are much less than those of 12/31/2021. This is typical, I’m sure. Is there any chance Congress will recognize this hardship and grant some relief similar to that granted several years ago when the virus pandemic began?

Answer:

Many account owners subject to RMDs (required minimum distributions) have seen their retirement balances decline this year. As such, their RMDs are elevated vs. current values. However, it is highly doubtful Congress will take any action to reduce or waive RMDs. The previous waiver was predicated on a world-wide pandemic that killed millions. What we are experiencing now is normal market ebbs and flows. Volatility is part of investing. Bulls and bears. Booms and recessions. Our suggestion is to bite the bullet, take the RMD, don’t expect a bailout from Congress, and possibly consider reallocating your account to minimize future volatility.

Question:

I inherited three traditional IRAs from my mother, who died in 2020. I withdrew all the money in one IRA at the end of 2020. I took a partial withdrawal in 2021 and withdrew the remaining money from the second IRA in 2022. Am I required to take a RMD from the third IRA in 2022 even though the amount I took from the second IRA in 2022 far exceeded the amount I would have been required to take from the third IRA in 2022? In other words, may an individual aggregate RMD amounts for all inherited IRAs, and withdraw the total from one IRA?

Thank you.

Diane

Answer:

Diane,

Yes, inherited IRAs from the same decedent can be aggregated for RMD purposes. Since all three of your inherited IRAs came from your mother, you can calculate the RMD on each and subsequently withdraw the total from any combination of the inherited IRAs. Inherited IRAs from different decedents cannot be aggregated.

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

“UPDATE NEEDED” – TOP 5 IRA ITEMS TO CONSIDER

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

We are constantly bombarded with requests to update our information. “Password needs updating.” “Software update for your mobile device.” “Please update your email so our marketing team can continue to fill your inbox with spam.” It is never ending. Most of these update requests are trash. An automatic delete. However, some updates are vitally important and demand our attention. Regarding retirement accounts and IRAs, here is a countdown of five critical items that should be considered, reviewed and updated immediately:

5. On-line 72(t) calculators. It is not just individuals that need to do some updating. Custodians and webmasters must as well. Historically, when calculating a 72(t) payment schedule, a reasonable interest rate was required for the amortization or annuity factor methods. The rate was defined as “any interest rate that is not more than 120 percent of the federal mid-term rate for either of the two months immediately preceding the month in which the distribution begins.” With IRS Notice 2022-6, that rate can be bumped to 5% if 120% of the federal mid-term rate is considered too low. Many on-line 72(t) calculators have yet to update for Notice 2022-6 and do not allow the user to manually override the pre-filled interest rate. Updates are needed.

4. Life expectancy factors. The IRS issued new life expectancy tables, effective in 2022. Anyone subject to required minimum distributions (RMDs) is required to switch to these tables for this year. The result for both lifetime and inherited IRAs will be slightly smaller RMDs. While failure to switch would not result in anything illegal, it would leave an account owner on an antiquated payout schedule and result in distributions that are slightly larger than necessary. Custodians must also update their software and on-line RMD calculators to reflect the new tables.

3. RMDs during the 10-year rule. Under the SECURE Act, most beneficiaries will be subject to the 10-year payout rule. When this pay period was first introduced, industry consensus was there were no annual RMDs for years 1-9. However, IRS proposed regulations issued last February apply a strict interpretation of the 10-year rule. For anyone who inherited an account from a person who died on or after their required beginning date, RMDs apply in years 1-9. Beneficiary payout schedules from inherited IRAs should be updated to include those RMDs.

2. Trusts. If you named a trust as your IRA beneficiary, and if that trust was drafted prior to the SECURE Act, it definitively must be reviewed and potentially updated…or scrapped altogether. The SECURE Act turned IRA beneficiary planning on its ear, and trusts as IRA beneficiaries are far less effective than they once were. As such, trusts created prior to the SECURE Act must be updated. Failure to do so could completely undercut the original intent of the trust.

1. Beneficiary forms. Far and away the most important item to review for possible updates are beneficiary forms. Time after time we see cases where retirement funds – dollars that took a lifetime to accrue – get paid to an unintended beneficiary or get gobbled up by attorneys as people fight over the proceeds. Beneficiary forms should be reviewed at least annually, and more frequently as life events occur. Marriage? Divorce? New child? All are legitimate reasons to review and potentially update your beneficiary forms.

Retirement and tax rules are dynamic. In addition to the items above, be sure to update your general knowledge to stay current with the important things in life.

https://www.irahelp.com/slottreport/%E2%80%9Cupdate-needed%E2%80%9D-%E2%80%93-top-5-ira-items-consider

IRS REGULATIONS AND QCDS: TODAY’S SLOTT REPORT MAILBAG

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

Question:

When will the IRS release final regulations for RMDs on beneficiary IRAs?

Kim

Answer:

Hi Kim,

That is a great question. We have been fielding many inquiries about when the final RMD regulations will be released by the IRS. The proposed regulations were released back in February, and a hearing was held in Washington a few months later as required by law. We are still waiting for final regulations, and no one really can say for sure when they will arrive. At the Slott Report, we carefully monitor any news coming out of the IRS, and we will keep you up to date on any developments with final regulations.

Question:

Will RMD distributions paid to charitable organizations as a QCD be counted in income calculations for purposes of IRMAA? RMD distributions that are not QCDs are counted.

Thanks,

Bill

Answer:

Hi Bill,

One of the big benefits of doing a qualified charitable distribution (QCD) is that the funds that go to charity are not included in adjusted gross income for purposes of calculating IRMAA surcharges for Medicare. You are correct that RMDs that are paid to the individual would be included. This can be avoided by using a QCD to take your RMD.

https://www.irahelp.com/slottreport/irs-regulations-and-qcds-todays-slott-report-mailbag

OCTOBER 17 IS THE DEADLINE TO CORRECT 2021 EXCESS IRA CONTRIBUTIONS WITHOUT PENALTY

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

Maybe you made a Roth IRA contribution for 2021, but your income was too high. Maybe you made a traditional IRA contribution without having any earned income. These are both examples of excess IRA contributions. The bad news is that excess IRA contributions happen can easily and often. The good news is that if you properly correct the contribution, you can avoid penalties.

October 17, 2022 Deadline

When it comes to correcting an excess IRA contribution for 2021, the key deadline is October 17, 2022. The statutory deadline is actually the tax-filing deadline, including extensions. However, the IRS has said that the applicable deadline for taxpayers who file a timely return is six months after the original due date for filing the tax return, even if no extension is filed. This year, October 15 is on a Saturday, so the deadline is Monday, October 17.

Why is this date so important? A 6% penalty applies to excess contributions. This penalty is not a one-and-done thing. It will apply every year that an excess contribution remains in the IRA. The only way to avoid the 6% penalty when an excess contribution occurs is to correct it by this deadline.

How to Fix the Excess Contribution

When an excess IRA contribution is discovered before the deadline, you have two choices to fix the error and avoid the 6% penalty. You can recharacterize the contribution or withdraw it. With either option, the slate is wiped clean, and the contribution is treated as though it was never made to the IRA where the excess occurred.

With either choice, the net income attributable to the excess contribution (NIA) must accompany the contribution. The NIA can be a loss if the IRA has lost value. The calculation of the NIA is based on the entire value of the IRA during the time the excess contribution was in the IRA. The NIA is calculated using a special IRS-approved formula. Many times, the IRA custodian will do the calculation. A worksheet with the formula can also be found in IRS Publication 590-A.

One option for correcting an excess IRA contribution is by withdrawal. Be sure to tell the IRA custodian that the distribution is a return of an excess contribution. With this method of correction, the contribution and the NIA are distributed. The contribution is not taxable, but the earnings would be taxable for the year in which the contribution was made. Earnings would also be subject to the 10% penalty if you are under age 59 ½ and an exception does not apply. The IRA custodian will use special reporting on Form 1099-R to reflect that this is a corrective distribution before the deadline.

The second option for correcting an excess IRA contribution is recharacterization. This is often overlooked as a viable strategy. Recharacterization is a way to move an unwanted tax-year contribution from a traditional IRA to a Roth IRA, or vice versa. If a contribution is recharacterized it will move from one type of IRA to another in a reportable, but nontaxable, transfer. The contribution will be treated as though it had been originally made to the IRA to which it is recharacterized.

Professional Advice Needed

Handling excess IRA contributions can be complicated. If you do it right, you can avoid penalties. To be sure that no mistakes are made, this is a good time to seek the advice of a professional tax or financial advisor.

https://www.irahelp.com/slottreport/october-17-deadline-correct-2021-excess-ira-contributions-without-penalty

ROTH CONVERSIONS AND INHERITED IRA RMDS: TODAY’S SLOTT REPORT MAILBAG

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

Question:

Late in December, 2021, a taxpayer (under age 59 ½) takes a distribution of his (traditional, not Roth) 401(k), and has 20% withheld for Federal tax. Early in January, 2022, the full 100% of the distribution is deposited in a Roth IRA. Does this avoid the 10% penalty for early distribution? Is this reportable as a Roth conversion in 2022 or 2021?

Answer:

The 10% early distribution penalty does not apply to Roth conversions. It’s not clear whether the taxpayer converted 80% of the distribution or came up with the funds out-of-pocket to make up the 20% withheld and convert the whole thing. If the taxpayer only converted 80%, then he would owe the 10% penalty on the 20% withheld. The 401(k) plan would report the distribution on a 2021 Form 1099-R, and the taxpayer would be taxed/penalized on the distribution in 2021 (even if the conversion is delayed until 2022). The IRA custodian would report the conversion on a 2022 Form 5498.

Question:

Hello,

I have done a lot of research on this and one’s head can spin as you read the different articles. Hoping you can clear up these two questions.

The Situation: Our 98-year-old mother passed in May, 2022. She had both a Roth IRA and a traditional IRA, and we (her children) were the primary beneficiaries of both IRAs. She passed before taking her 2022 traditional IRA RMD. The broker created inherited Roth and traditional IRAs for us and, during the process, sent us each a check that totaled Mom’s 2022 RMD amount so that her 2022 year-of-death RMD was satisfied.

On our inherited traditional IRAs, we understand that based on February 2022 IRS guidance we need to take annual RMDs from those accounts over 10 years and have the inherited traditional IRAs emptied by the end of the 10th year. With Mom’s 2022 RMD already having been satisfied, is our first RMD year 2022 or 2023? Our understanding is that there are no annual RMDs on our inherited Roth IRAs, but that we must have emptied them by the end of the 10th year. Is our understanding correct?

Thanks for fielding everyone’s questions and sharing your answers.  It is a great service!

Greg

Answer:

Hi Greg,

Appreciate the compliment, and sorry for your loss. These rules are complicated, but you have a good grasp of them. Since Mom died after her RMD required beginning date, the inherited traditional IRAs must be emptied by 12/31/32, and annual RMDs (based on the beneficiary’s single life expectancy) must be taken starting in 2023. The rules are different for the inherited Roth IRAs. Those accounts also must be emptied by 12/31/32, but annual RMDs are not required during the 10-year period because Roth IRA owners are always considered to have died before their required beginning date.

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

HOW ARE ROTH 401(K) DISTRIBUTIONS TAXED?

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

More and more 401(k) plans now offer Roth contributions. At the same time, Americans are changing jobs and receiving 401(k) distributions in record numbers. So, it’s a good time to review the tax rules that apply to Roth 401(k) withdrawals. (The same rules also apply to Roth 403(b) and Roth 457(b) withdrawals.)

Roth 401(k) contributions are made with already-taxed compensation. So, if you are eligible for a distribution, you can withdraw the contributions themselves without paying taxes. (If you’re still working, you can’t withdraw Roth contributions before age 59 ½ except for hardship.) But earnings on Roth contributions only come out tax-free if the distribution is considered “qualified.”

To be qualified, a distribution must satisfy two requirements. First, you must be at least 59½ at the time of distribution (or the distribution must be on account of your disability or death). Second, you must have held the Roth 401(k) account for more than five years. This five-year holding period starts on January 1 of the first year you made a Roth contribution to the plan that the distribution is coming from. Periods during which you made Roth contributions to other 401(k) plans don’t count (unless you rolled over those contributions to your current employer’s plan). Any other non-Roth 401(k) contributions are also ignored.

Example 1: From 2012-2018, Denise worked for Alpha Company and made Roth contributions to the Alpha 401(k). In 2018, Denise left Alpha and began working for Beta Company. She made her first Roth 401(k) contribution to that plan on July 1, 2018. In 2022, at age 60, Denise wants to withdraw from her Beta Roth 401(k) account. If she does that, the earnings on account will be taxable since her distribution won’t be qualified. Although she is over 59 ½, her five-year holding period, which began January 1, 2018, won’t until December 31, 2022. Denise won’t get credit for her Alpha Roth 401(k) contributions unless she rolls over those funds to the Beta 401(k).

If your distribution is not qualified, a portion will be subject to tax under the pro-rata rule. To determine how much is taxable, following these steps:

  • Step 1 – Divide the amount of your Roth 401(k) contributions by your total Roth 401(k) account balance (contributions + earnings).
  • Step 2 – Multiply the Step 1 percentage by your total distribution amount.
  • Step 3 – Subtract the Step 2 amount from your total distribution amount.

Example 2: Denise (from Example 1) goes forward with a partial Roth 401(k) withdrawal of $20,000 from the Beta plan. She has made $35,000 of Beta Roth 401(k) deferrals, and her total Roth 401(k) account balance (contributions + earnings) is $50,000. The Step 1 fraction is 70% ($35,000 / $50,000), and the Step 2 amount is $14,000 ($20,000 x 70%). This means the Step 3 amount – the taxable portion of the $20,000 withdrawal – is $6,000 ($20,000 – $14,000). Denise can take the remaining $14,000 tax-free.

https://www.irahelp.com/slottreport/how-are-roth-401k-distributions-taxed

QCDS AND THE ABSOLUTE NECESSITY FOR A CWA

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

Qualified Charitable Distributions (QCDs) are a common transaction these days, but all guidelines must be followed to ensure the QCD is valid. Recent court cases have exposed the absolute necessity to adhere to the rules…or the donation could be disallowed.

For IRA owners who are age 70 ½ and older, donations paid directly from an IRA to an eligible charity may be excluded from income. Using QCDs to offset all or a portion of a required minimum distribution (RMD) is incredibly popular. Up to $100,000 annually can be sent to charity via QCD, and this is in addition to the standard deduction. However, there can be no benefit back to the taxpayer. No goods or services, other than an intangible religious benefit, can be received in exchange for the contribution. This language is important.

Regarding itemized charitable deductions, historically taxpayers have been “a little loose” with their details. Overstatements and fabrications were (and are probably still) rampant. Deductions were taken for more than what was donated, and for donations that never even occurred. To curb abuse, Congress passed strict laws governing the reporting of charitable contributions. These rules cover both cash and non-cash donations. How much was given? What was the fair market value of the item? What was the taxpayer’s cost basis on that item? On and on the rules go.

Not surprisingly, most donations need to be documented with some sort of receipt. Officially, this is called a “contemporaneous written acknowledgement” (CWA), and it is applicable to all contributions of $250 or more. Ultimately, when a QCD is done, the necessary documentation needed for a tax return includes the amount of the donation, the date of the donation, the name of the charity, and whether the charity provided any goods or services for the donation. (Remember, no goods or services, other than an intangible religious benefit, can be received in exchange for the contribution.)

Since QCDs are typically sent directly from the custodian to the charity, verifying the date, amount and to whom the dollars were sent should be easy. The tricky part is getting the proper receipt from the charity. Even if no goods or services were received, the CWA cannot remain silent on this issue. It must state that nothing was transferred back to the donor. And if the language about “no goods or services being received” is missing, the entire donation could be disallowed.

In one particular court case, all parties agreed that a donation was made. However, the “no goods or services received” language was missing from the CWA. Despite the obvious donation, the judge’s hands were tied. Based on the strict laws, the charitable deduction was denied. Additionally, there is no retroactive fix. Why? Because the CWA must be obtained by the taxpayer on or before the earlier of the date on which the taxpayer files a return, or the due date (including extensions) for filing the return. Creating and sending the proper documentation after the fact is of no help. (Note that while this court case involved an itemized charitable deduction, the same CWA rules apply to QCDs.)

Please be careful. It is imperative that QCD and general charitable donation rules are acknowledged and firmly adhered to. Otherwise, simple acts of kindness and giving can be ruined and tax benefits lost.

https://www.irahelp.com/slottreport/qcds-and-absolute-necessity-cwa

REQUIRED MINIMUM DISTRIBUTIONS AND NET UNREALIZED APPRECIATION: TODAY’S SLOTT REPORT MAILBAG

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

Question:

I turn 72 in 2023. If I wait to take my first RMD until 4/1/24, do I calculate it using my IRA balance on 12/31/23 or on 12/31/22? I think 12/31/22, but do not want to assume. I can’t find a clear answer in Pub 590-B.

Tim

Answer:

Tim,

Since you turn 72 next year (2023), that will be your first year to take a required minimum distribution (RMD). You are correct – the 2023 RMD is calculated using the 12/31/2022 IRA balance. Yes, you are allowed to delay your first RMD until April 1 of 2024. However, delaying the 2023 RMD does not change how it is calculated. You will still use the 12/31/2022 balance.

Question:

I have a client where we initiated a partial NUA (net unrealized appreciation) distribution of approximately $300K of stock with a basis of $113K into a nonqualified account. The remainder of stock ($200K and rest of 401(k) dollars) were to be rolled directly into an IRA. However, the 401(k) provider made a mistake and instead distributed the entire $500K of stock into the nonqualified account. After consulting with a CPA, he thinks we can use a 60-day rollover to fix this by taking the $200K of stock and rolling it back into IRA. Is this accurate?

Sincerely,

Collin

Answer:

Collin,

The CPA is correct. Assuming we are still within the 60-day window from when the stock was originally distributed from the plan, any shares that are subsequently rolled to an IRA will avoid taxation and will not be included in the NUA transaction. Incidentally, even if your client had done another 60-day rollover within the previous 12 months, the one-rollover-per-year rule is not an issue because plan-to-IRA rollovers don’t count. While the $200K in stock shares are moving through a non-qualified brokerage account, this is still considered a plan-to-IRA rollover.

https://www.irahelp.com/slottreport/required-minimum-distributions-and-net-unrealized-appreciation-todays-slott-report

3 IRA RULES TO KNOW BEFORE YOU WALK DOWN THE AISLE

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

According to many recent surveys, the fall months of September and October are overtaking June as the most popular time of year to tie the knot. If your wedding is approaching in the next few months, the last thing you may be thinking about is your retirement account, but when it comes to IRA rules, marriage has its benefits. Here are three IRA rules you should know before you walk down the aisle:

1. You can make spousal IRA contributions: 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 2022, you must be legally married on December 31, 2022 and file a joint federal income tax return for 2022. If you are divorced or legally separated as of that date, neither spouse is eligible for a spousal contribution, even if they were married earlier in the year.

2. You are able to use the Joint Life Expectancy Table for Required Minimum Distributions (RMDS): When you reach age 72, you must start taking distribution annually, called required minimum distributions. 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.

3. You have special benefits as a spouse beneficiary. The benefits of being married continue even after the death of a spouse. Only a spouse beneficiary can roll over or transfer an inherited IRA from a deceased spouse into their 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 72. Non-spouse beneficiaries do not have this 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 the 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 rule unavailable to non-spouse beneficiaries. If you are the sole beneficiary, and if your spouse dies before their required beginning date (RBD) – when RNDs are to begin – you can delay RMDs from the inherited IRA until the year your spouse would have attained age 72. 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.

Best wishes to all the new brides and grooms!

https://www.irahelp.com/slottreport/3-ira-rules-know-you-walk-down-aisle

THE LIMITS OF ERISA SPOUSAL PROTECTION

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

A recent federal court case from West Virginia illustrates that the spouse of a 401(k) participant usually has no right to prevent the plan from paying the participant a lump sum distribution.

In Gifford v. Burton, a Mr. Gifford (his first name is omitted in the decision) was an optician at Walmart and a participant in the Walmart 401(k) plan. He was married to Sara Gifford, who was his sole beneficiary under the plan. In February 2021, Mr. Gifford received a distribution of all of his 401(k) funds and deposited those funds into an IRA. He then designated his daughter, Emma Gifford, as 90% beneficiary of his IRA and wife Sara as 10% beneficiary.

Mr. Gifford didn’t obtain spousal consent from Sara before receiving the 401(k) distribution. Sara sued, arguing that ERISA required her to consent to the payout. She lost.

ERISA does ban certain retirement plans from paying lump sums to married participants without spousal consent. For those plans, married participants must have their distribution paid in the form of a “qualified joint and survivor annuity” (QJSA), unless the spouse gives consent to another form of payment such as a  lump sum. 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.

However, this spousal consent requirement does not apply to most 401(k) plans. It only applies if a 401(k) offers a lifetime annuity as an optional form of payment and a married participant elects the lifetime annuity. Most 401(k) plans don’t offer a lifetime annuity. Since the Walmart plan falls into that category, Mr. Gifford didn’t need Sara’s approval before electing a lump sum. Note that, unlike most 401(k) plans, the spousal consent rule does apply to all ERISA-covered defined benefit pension plans.

A second type of spousal consent does apply to all 401(k) plans subject to ERISA. (Most 401(k) plans are subject to ERISA. Exceptions include the federal Thrift Savings Plan and solo 401(k) plans.) This rule requires the spouse of a married employee to agree to the employee’s designation of someone other than the spouse as 401(k) beneficiary. So, if Mr. Gifford had attempted to name daughter Emma as his 401(k) beneficiary, wife Sara would have needed to consent to that designation.

This beneficiary rule does not apply to most IRAs, since IRAs aren’t subject to ERISA. So, in most states, a married IRA owner can name anyone he wants as beneficiary without first getting spousal consent. However, in community property states, spousal consent to a non-spouse beneficiary is required for IRAs opened during the marriage.

These rules are helpful to a married person (like Mr. Gifford) who wants to leave his retirement funds to someone besides his spouse. Once eligible, that married person can receive a lump sum 401(k) payment, roll over those funds to an IRA and designate anyone as beneficiary. In most cases, neither the 401(k) distribution nor the IRA beneficiary designation requires spousal consent.

https://www.irahelp.com/slottreport/limits-erisa-spousal-protection

REQUIRED MINIMUM DISTRIBUTIONS AND INHERITED IRAS: TODAY’S SLOTT REPORT MAILBAG

By Sarah Brenner, JD
IRA Analyst
Follow Us on Twitter: 
@theslottreport
Question:

By law I must withdraw a certain percentage from my retirement accounts to meet the required RMD. And I will have to pay income taxes on that amount. The percentage amount I must withdraw is based on the value of the account as of December 31, 2021 at which time the market was very high. My stocks and mutual fund investments are now worth a lot less than they were in December 2021…at least 30% less! This means I will have to sell a lot more of my investments (and reduce my retirement nest egg) in order to meet the RMD percentage of value.

I know that if all my investments were in a Roth IRA, I would not have this problem. However, I cannot be alone in this and wonder if the feds have any plans to give some relief to us seniors?

Barbara

Answer:

Hi Barbara,

The volatile markets have left many retirement account owners in the same situation as you. Required minimum distributions (RMDs) for 2022 are calculated based on the December 31, 2021 balance. Many account owners have seen their accounts decline in value since then. Unfortunately, this time around there have been no signs that Congress will be providing any relief.

One possible strategy that may help is to take your RMD in kind. This is allowed. You can simply transfer the stock from your IRA to a non-retirement brokerage account. Your RMD will be taxable but in the future the stock may rebound, and you could reap the benefits outside your retirement account.

You mention Roth IRAs. Now, when account values are low, is a good time to consider converting. Turbulent markets are likely to be with us for a while. Converting funds to a Roth IRA would eliminate the worry of future RMDs for you.

Question:

I inherited an IRA from my father. I am interested in converting this IRA to a Roth IRA. How do I go about getting this done?

Thank you for your help.

Barry

Answer:

Hi Barry,

Unfortunately, you are not allowed to convert the IRA you inherited from your father to a Roth IRA. The rules do not allow nonspouse IRA beneficiaries to convert. This is a strange quirk in the tax code because nonspouse beneficiaries of employer plans are permitted to convert. Congress may change this rule some day but for now we are stuck with it.

https://www.irahelp.com/slottreport/required-minimum-distributions-and-inherited-iras-todays-slott-report-mailbag-0

ROTH IRA DISTRIBUTION ORDERING RULES

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

This may seem like a rudimentary topic, but it is the basics that are often so confusing. A fundamental understanding of Roth IRA distributions is essential for Roth IRA owners. In a blog post from June 8 (“One Roth IRA Bucket”), I created a scenario where a person had five Roth IRAs, a couple of traditional IRAs, and was doing Roth conversions. The point of that exercise was to demonstrate how the IRS knows what dollars within all of a person’s Roth IRAs are contributions, what are conversions, and what are earnings. Additionally, I stressed that the IRS treats the entirety of a person’s Roth IRAs, regardless of how many, as a single Roth IRA.

Why is it so important to know which dollars are which within a Roth IRA? Because Roth IRA distributions follow strict ordering rules. There is no such thing as FIFO (“first in, first out”) with a Roth IRA. LIFO (“last in, first out”) and pro rata also have zero bearing on Roth IRA withdrawals. In fact, there is a simple ordering procedure for Roth IRA distributions:

  • Contributions come out first. When they are depleted…
  • Converted dollars come next. When they are depleted…
  • Earnings come out last.

That’s it. Those are the ordering rules, and it does not matter from which Roth IRA you take a distribution. Remember, all the IRS sees when it looks at all of your Roth IRA accounts is one bucket of Roth IRA dollars, subdivided into contributions, conversions and earnings.

What about access to these dollars? A person can always withdraw Roth IRA funds, no questions asked. The issue is whether those dollars will be subject to the 10% early withdrawal penalty and/or taxes. This article will not get into the weeds of the Roth 5-year clocks, nor will it cover exceptions to the 10% penalty. Space is limited. However, below is an overview of the different types of Roth IRA dollars (contributions, conversions and earnings) and a brief explanation of when those funds are available.

Contributions. Roth IRA contributions are always available tax- and penalty-free. It does not matter how long the Roth IRA was opened or how old you are. If you made any contribution to a Roth IRA in any year, those dollars can be withdrawn at any time for any reason. Fortunately, based on the ordering rules, Roth IRA contributions come out first. Until you exceed the amount of contributions with your withdrawals, converted dollars and earnings will stay put.

Conversions. Conversions come out next. Since the tax was paid in the year of conversion, these dollars come out tax-free. Roth IRA converted dollars are penalty-free after 5 years OR age 59 ½. The word “or” is key. If either of these targets are hit, the converted dollars are available free and clear. There are no other variables. Did you hit your 5-year conversion clock on these specific converted dollars? OR, are you 59 ½ or older? If yes for either, then you have full access to the converted Roth IRA funds.

Earnings come out last. They are available tax- and penalty-free after 5 years AND 59 ½. The word “and” is crucial. BOTH must be satisfied. (Note that earnings are always penalty-free if you are over 59 ½.)  If you had any Roth IRA for 5 years AND meet the age limit, congratulations! All your Roth IRA dollars will forever be tax- and penalty-free.

https://www.irahelp.com/slottreport/roth-ira-distribution-ordering-rules