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IRA BLOG

SECURE ACT REGULATIONS AND INHERITED IRAS: TODAY’S SLOTT REPORT MAILBAG

Question:

When can we expect final SECURE Act regulations from the IRS?

Mike

Answer:

Hi Mike,

No one knows for sure. However, there is now some hope that these may be coming sooner rather than later. In recently released Notice 2024-35, the IRS said that final regulations are anticipated to apply for determining RMDs for 2025 and beyond. If the IRS is true to its word, then final regulations would be issued by the end of 2024.

Question:

Good afternoon,

We have received conflicting guidance and advice regarding an inherited IRA situation and were hoping you could help. A client born in 1962 passed away in 2011 and left his IRA to his father. The father was born in 1940 and died in 2012. Upon his passing, he left the IRA to his wife (the original client’s mother). She was born in 1942 and just passed away in May 2024, leaving the IRA to her other son (born in 1964).

The wife had been taking annual required minimum distributions (RMDs) from the inherited IRA based on her late husband’s life expectancy. We are wondering whether her surviving son is allowed to continue stretching RMDs or must empty the IRA account in 10 years.

One source told us the SECURE Act rules do not apply because both the original owner and original beneficiary passed away prior to the new law, meaning the surviving son continues to take annual RMDs from the inherited IRA based on his late father’s remaining life expectancy. Another source told us the SECURE Act rules do apply, and the surviving son has to drain the IRA completely within 10 years, but does not have annual RMDs in years 1 through 9.

Knowing you all are THE industry experts, we are hoping you can break the tie on what the technical rule is here. Thanks for your help.

Amit

Answer:

Hi Amit,

This is a little tricky! The IRA was inherited prior to the SECURE Act, so the original beneficiary (the father) was able to stretch RMDs over his life expectancy. This payout method would have continued for the first successor beneficiary (his wife).

However, with her death in 2024 the SECURE Act would apply for the second successor beneficiary (the surviving son). That would mean the inherited IRA would be subject to the 10-year rule and must be emptied by 12/31/34.

In addition, the IRS proposed regulations would require annual RMDs in years 1-9 of the 10-year period based on the original beneficiary’s (the father’s) life expectancy. Due to all the confusion over this requirement, the IRS has so far waived it for 2021, 2022, 2023, and 2024. It remains to be seen what will happen in future years.

 

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

https://irahelp.com/slottreport/secure-act-regulations-and-inherited-iras-todays-slott-report-mailbag/

ROTH 401(K) TO A ROTH IRA ROLLOVER: HOW DOES THIS WORK?

As retirement account questions go, this is the shortest inquiry with the longest answer. When asked what factors to consider and what 5-year clocks apply with a Roth 401(k) to Roth IRA rollover, I take a big breath and say, “Pull up a chair.” There are a number of variables to determine. Probing questions must be posed before any guidance can be given.

First, we must determine if this is a “qualified distribution” or not. A qualified distribution from a Roth 401(k) means the person had the Roth 401(k) for 5 years AND is age 59 ½ or older. If either of these hurdles come up short, then we have a NON-qualified distribution. Assume a person meets the requirements for a qualified distribution. In that case, upon rollover, all former Roth 401(k) dollars go into the Roth IRA as basis and are available for immediate distribution tax-free. Essentially, all dollars go into the Roth IRA as one big contribution, and a person always has access to their contributory Roth IRA funds.

What about the 5-year clock? The 5-year holding period is the period applicable to the Roth IRA. So, even if this was the first Roth IRA a person ever had and it was just opened to receive the Roth 401(k) dollars, a qualified distribution from the plan means all dollars rolled into the Roth IRA are available. If this was a brand-new Roth IRA and the person never had a Roth IRA before, there would be a 5-year wait for any subsequent EARNINGS to be tax-free, but the rollover dollars are accessible.

What if a Roth 401(k) participant could NOT check both boxes – meaning they were either under 59 ½ or did not have the Roth 401(k) for 5 years? Then it would be a non-qualified distribution. With a non-qualified distribution, former Roth 401(k) dollars “maintain their same character” when they roll into the Roth IRA. Salary deferrals into the plan will dump into the Roth IRA “contribution bucket” as basis, and Roth 401(k) earnings will dump into the Roth IRA earnings bucket. As with a qualified distribution, the 5-year holding period will be the period applicable to the Roth IRA.

Qualified vs. non-qualified distributions from a plan is an important distinction. If a plan participant held their Roth 401(k) for only four years (non-qualified), but elected to roll the Roth 401(k) into a brand new Roth IRA (and this person never had a Roth IRA before), then they would lose the 4 years…because the Roth IRA clock takes precedence. On the flip side, if this same person already had a Roth IRA for 5 years, then the former Roth 401(k) dollars would essentially zoom forward and adopt the more advanced 5-year Roth IRA period. Upon rollover, the Roth IRA 5-year clock takes precedence, whether that is beneficial or not.

In summary, when rolling Roth 401(k) dollars to a Roth IRA, the following variables must be considered:

  • Is this a qualified distribution (age 59 ½ AND 5 years in the Roth plan), or is it non-qualified?
  • How long was the Roth IRA held? (The Roth IRA clock will take precedence.)
  • A qualified distribution means all plan dollars come over as basis.
  • With a NON-qualified distribution, the rollover dollars “maintain their character” when dumping into the Roth IRA contributions and earnings buckets.

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

https://irahelp.com/slottreport/roth-401k-to-a-roth-ira-rollover-how-does-this-work/

GOVERNMENT REPORT HIGHLIGHTS CONFUSION OVER 401(K) DISTRIBUTION OPTIONS

A recent government report highlights how confused 401(k) participants are when they have to decide what to do with their savings after leaving employment.

Tax rules require401(k) plans (and 403(b) and governmental 457(b) plans) to provide a written notice when participants become entitled to a distribution that can be rolled over. The notice must explain they can do a direct rollover to an IRA or another plan and that a mandatory 20% will be withheld from their payment if they don’t do a direct rollover.

The IRS provides model notices that plans can use to satisfy this notice requirement. Plans typically send the model notice as an attachment to the distribution application form after a participant requests a distribution. But these model notices have been widely criticized as too complicated for the average plan participant to understand.

The SECURE 2.0 Act required the General Accountability Office (GAO) to issue a report to Congress on the effectiveness of the notices and to make recommendations on how to improve them. The GAO surveyed over 1,000 401(k) participants who, between 2019 and 2022, were eligible to do a rollover to another plan.

The GAO report results are not surprising, but are still disturbing.

The survey showed that over 80% of eligible participants did not know that they have four options after leaving an employer: Keep their funds in the existing plan; roll over the funds to a new employer’s plan; roll over the funds to an IRA; or take a lump sum distribution. Over 50% were unaware of the “keeping funds in the plan” option. The GAO said this lack of knowledge was probably because IRS regulations do not require that the notice given out to participants must include information about this option.

In addition, about 40% did not understand three basic tax consequences about distribution options: First, participants can retain the tax-deferred status of their savings by doing a rollover to another retirement account or by leaving funds in the plan. Second, if they take a lump sum distribution, they are subject to a mandatory 20% tax withholding and a 10% penalty if under age 59 ½. Third, if they do an indirect rollover, they must add additional funds to make up for withheld taxes and deposit the savings into a new account plan within 60 days to avoid taxes and possible penalties.

Particularly troubling is that only about 35% of participants received a notice before they made a decision about their 401(k) funds.

The bottom line is that the retirement plan distribution rules are extremely challenging. If you are leaving your employer and have 401(k) savings, by all means seek help from an experienced financial advisor.

 

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

THE AGE 55 EXCEPTION AND ROLLOVERS OF ROTH IRAS: TODAY’S SLOTT REPORT MAILBAG

Question:

Can an individual who is using the age 55 exception to the 10% early distribution penalty roll over a part of a 403(b) account to an IRA and leave a portion in the 403(b) to take penalty-free withdrawals?

Thank you,

Jamie

Answer:

Hi Jamie,

There is no rule under the tax code that says the age 55 exception can’t still be used after a portion of the account balance has been previously rolled over to an IRA. However, it’s possible the 403(b) plan may have an administrative rule that bars participants from taking partial distributions. You should check with the plan’s administrator to confirm any plan-specific guidelines.

Question:

Can a Roth IRA be rolled into a Roth 401(k)?

Answer:

No. Only pre-tax IRA funds can be rolled over to workplace plans. Roth IRAs can only be rolled over to other Roth IRAs.

https://irahelp.com/slottreport/the-age-55-exception-and-rollovers-of-roth-iras-todays-slott-report-mailbag/

FIVE RMD FACTS EVERY IRA OWNER SHOULD KNOW

If you have an IRA and you are approaching retirement age, you have probably heard the term “required minimum distribution” (RMD). But do you know the details of how the rules work and what they mean for you? Here are five facts about RMDs that every IRA owner should know.

  1. If you have a traditional IRA (including a SEP or SIMPLE IRA), you must take an RMD for each year beginning for the year you reach age 73. If you are still working, that will not delay when you must take an RMD from any IRAIf you have a Roth IRA, no RMDs are required during your lifetime. Converting your IRA to Roth IRA would result in no further RMDs being required in your lifetime.
  2. The deadline for taking your first RMD is your required beginning date, which is April 1 of the year following the year you reach age 73. This is the only time you will have beyond the calendar year to take your RMD. The deadline for taking your RMD for years after you reach age 73 is December 31If you delayed taking your first RMD until April 1 of the following year, you will then need to take another RMD by December 31 to satisfy the requirement for the second year.
  3. RMDS are calculated separately for each IRA, but then may be aggregated and the total amount taken from one IRA. You may not take the RMD for an IRA from your company plan or from your Roth IRA. You can aggregate traditional IRAs that you own. You can separately aggregate IRAs inherited from the same person. Your RMD may not be rolled over to another IRA or converted to a Roth IRA. Once you have satisfied your RMD for the year for your IRA, you may then roll over or convert the IRA.
  4. Your RMD is calculated by dividing your December 31 prior-year IRA balance by a life expectancy factor. The year-end balance may need to be adjusted in rare circumstances like rollovers or transfers that are outstanding on December 31 of the prior year. Life expectancy is determined using the Uniform Lifetime Table, unless the sole beneficiary of your IRA for the entire year is your spouse who is more than ten years younger than you. If that is the case, you would use the Joint Life Expectancy Table. Special rules apply for death and divorce when it comes to using this table.
  5. If you fail to take your RMD by the deadline there is 25% penalty on the amount of the shortfall. If you miss your RMD for the year, you should take it as soon as possible. You should consult with your tax advisor about filing Form 5329 and asking for a waiver of the penalty. The IRS will waive the penalty for good cause.

https://irahelp.com/slottreport/five-rmd-facts-every-ira-owner-should-know/

SIMPLE PLAN CONTRIBUTION LIMITS: INCREASED FOR MANY

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

 

We have written about this subject in the past (December 2023), but as is our philosophy here, learning is all about repetition, repetition, repetition. Surprisingly (he says with tongue firmly planted in cheek), not everyone reads every Slott Report entry. For some, this could be the first time they are hearing about these new SIMPLE plan contribution rules.

The basics: SIMPLE plans are available for companies with 100 or fewer employees who received at least $5,000 in pay from the company in the prior year. They were originally designed to be easier to administer than a 401(k), hence the name. SIMPLE plans allow for both employee and employer contributions, and those dollar amounts have always been clear. For example, the maximum SIMPLE annual salary deferral for 2024 is $16,000. For those who are age 50 or older, the 2024 catch-up contribution amount is $3,500.

Now enter the confusing parts.

SECURE 2.0 made some significant changes to the SIMPLE IRA plan contribution limits. For businesses with 25 or fewer employees, starting in 2024, both the “normal” salary deferral limit and the age-50-and-over catch-up limit are increased by 10% above the standard amounts listed in the preceding paragraph. This pushes the 2024 limits to $17,600 and $3,850, respectively.

What about businesses with 26 employees or more? These larger companies (26 – 100 employees) can elect the extra 10%, but only under two possible conditions:

  • If they provide a 4% (instead of 3%) matching contribution, OR
  • If they provide a 3% (instead of 2%) across-the-board contribution.

So, while the SIMPLE contribution limits are reported as $16,000 and $3,500, there is a good chance that a significant number of employees can actually contribute more.

The next layer of confusion with SIMPLE plans is, of course…how do we determine how many employees the business actually has? IRS Notice 2024-02, released on December 20, 2023, explains how to determine the official employee headcount:

  • The increased SIMPLE contribution limits apply automatically in the case of an eligible employer that has no more than 25 employees who received at least $5,000 of compensation for the preceding calendar year.
  • For an employer that has more than 25 employees who received at least $5,000 of compensation for the preceding year, the increased limits apply only if the employer makes an election for the increased limits to apply. To determine the number of employees with at least $5,000 of compensation, all employees employed at any time during the calendar year are considered, regardless of whether they are eligible to participate in the SIMPLE IRA plan.

Bottom line: If you have any affiliation with a SIMPLE plan, be sure to recognize that the 2024 contribution limits have been increased by 10% for many (but not all) participants.

https://irahelp.com/slottreport/simple-plan-contribution-limits-increased-for-many/

WHEN A REVERSE ROLLOVER MAKES SENSE

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

In a famous “Seinfeld” episode, George Costanza, unemployed, living with his parents and without a girlfriend, decides to do the opposite of what he would normally do. It pays off for him big time as he lands a front office job with the New York Yankees (after criticizing the owner during a job interview) and begins dating a beautiful woman after approaching her at the coffee shop.

Doing the opposite can also make sense when it comes to rollovers. A rollover between 401(k) funds and an IRA usually involves moving the funds from the plan to the IRA. But sometimes a “reverse rollover” – from an IRA to a 401(k) – is a smart move.

Beware, however, that there are a few roadblocks to doing reverse rollovers. Company plans like 401(k)s aren’t required to allow rollovers into the plan, although many do. So, before withdrawing your IRA, check with your plan administrator or HR rep. Also, the tax code only allows reverse rollovers of pre-tax IRA funds. You can’t do reverse rollovers of Roth IRA and traditional after-tax IRA accounts.

The biggest advantage of doing a reverse rollover is to minimize – or avoid altogether –taxes when you convert after-tax IRA funds to a Roth IRA through a “backdoor” conversion. The tax code’s pro-rata rule looks at all of your non-Roth IRA accounts (including SEP and SIMPLE IRAs) as of December 31 of the year you do the conversion. If you have any pre-tax funds on December 31, a portion of the conversion will be taxable. But if you have rolled over your pre-tax IRAs to a 401(k) during the year, you’ll be left with only after-tax funds as of December 31, and the conversion can be tax-free. And, you still can “reverse the reverse rollover,” by rolling the 401(k) funds back to the IRA in the next year.

There are other good reasons to move your IRA to your plan:

  • If you work past April 1 following the year you turn age 73 and don’t own more than 5% of the company sponsoring the plan, RMDs from your pre-tax 401(k) dollars can be delayed until you leave your job.
  • If you leave your job at age 55 or older (the earlier of age 50 or 25 years of service for certain public safety employees), you can receive your 401(k) without paying the 10% penalty.
  • If the plan allows, you can borrow from your 401(k) plan.
  • Depending on your state’s laws, your retirement savings may be better protected from creditors while in a 401(k) than while in an IRA.

But, there are also many good reasons to keep your money in the IRA. These include: earlier access to your funds, easier coordination with estate planning; being able to do QCDs (qualified charitable distributions); wider investment options; and the ability to aggregate RMDs.

So, check with a knowledgeable financial advisor before pulling the trigger on a reverse rollover.

https://irahelp.com/slottreport/when-a-reverse-rollover-makes-sense/

NET UNREALIZED APPRECIATION AND QUALIFIED CHARITABLE DISTRIBUTIONS: TODAY’S SLOTT REPORT MAILBAG

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

 

Question:

I need guidance on a new client with the following information:

  • Is age 55;
  • Has a $700,000 ESOP in a company that he separated from over 10 years ago; and
  • Wants diversification.

Since he separated from the company over 10 years ago and is now age 55, would he be eligible for the following:  Have the ESOP transferred to a traditional brokerage account, pay income tax on the cost basis, pay no early withdrawal 10% penalty, diversify the stock, and pay long-term capital gain tax via the Net Unrealized Appreciation (NUA) tax break provision on the appreciated value.

Thanks, Eric

Answer:

Hi Eric,

If there is highly appreciated company stock in a plan, it is always worth at least considering the NUA strategy. That strategy allows long-term capital gains treatment on the appreciation of plan-held company stock that is distributed in kind from the plan to a nonqualified account. The cost basis is included in taxable income and any appreciation after distribution is subject to the standard rules for capital gains treatment.

To qualify for NUA, there must be a triggering event. Both separation from service and reaching age 59 ½ are triggering events. You must also have a lump sum distribution. This means that all funds in like plans must be emptied in one year. Any distributions taken after the triggering event but before the year of the lump sum distribution would kill the opportunity to do NUA. Also, some ESOPs (especially with privately-held companies) may impose restrictions on distributions or on the period stock can be held outside the ESOP in a way that makes the NUA tax break impossible or limits its advantages.

You mention that the individual is age 55 now, but separated from service 10 years ago. That would mean that the cost basis would be taxable and subject to the 10% early distribution penalty. The age 55 exception only applies to those who separate from service in the year they reach age 55 or later and that is not the case here.

Hopefully, this points you in the right direction. Any potential NUA transaction should be discussed in detail with the client. There are many nuances and finer points that should be addressed thoroughly. We like to say that NUA is an art and not a science.

Question:

If the estate is the beneficiary of an IRA, can the estate do a qualified charitable distribution (QCD) with the year of death RMD?

Thanks!

Answer:

It is possible for some beneficiaries to do a QCD from an inherited IRA. However, it will not work for an estate. That is because to do a QCD you must be age 70 ½ or older. An estate cannot satisfy this requirement.

https://irahelp.com/slottreport/net-unrealized-appreciation-and-qualified-charitable-distributions-todays-slott-report-mailbag/

WHAT YOU NEED TO KNOW ABOUT COMMUNITY PROPERTY AND YOUR IRA

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

What do you get when community property mixes with your IRA? Well, you will discover that the results can be confusing. Here are some facts every IRA owner should know.

Community Property States

The community property system has been adopted by nine states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Alaska has adopted an optional community property system. Are you off the hook when it comes to community property if you currently live in another state? Not so fast. Society is increasingly mobile. It is not uncommon during a lifetime to move to and from community property states.

How Community Property Works

Community property is everything a husband and wife own together. In general, this includes all money earned and property acquired during the marriage. How do your IRAs fit in? Assets held in an IRA will be community property to the extent that contributions were made to the account and earnings accrue during the marriage.

It’s important to keep in mind that community property rules can vary from state to state. For example, California community property law is not the same as Arizona community property law.

When are community property issues likely to come up with your IRA? Well, generally, there are two significant times where you might encounter these issues as an IRA owner. When it comes to determining who gets your IRA after a divorce or death, community property rules will come into play.

Divorce

In community property states, a spouse may have a community property interest in the other spouse’s IRA. By doing a trustee-to trustee transfer, this interest can be moved from one spouse’s IRA to the other spouse’s IRA after a divorce without negative tax consequences. You will need a court order for this transfer to be done.

Naming IRA Beneficiaries

Since community property law can dictate who gets your IRA after death, it must be taken into account when you name a beneficiary on an IRA. In a community property state, state law may recognize your spouse as the beneficiary of some or all of your IRA. Therefore, you may need to get your spouse’s written consent to name someone else as the beneficiary of your IRA.

Some IRA custodians have beneficiary designation forms with language for spousal consent to name a non-spouse beneficiary. Others do not. Even if a beneficiary designation form does include spousal waiver language, some experts caution against relying on it. To be sure that all goes as planned, the safest approach is for you and your spouse to each have your own separate counsel and for an experienced attorney to draft the necessary documents.

Expert Advice Needed

Now you know that community property can raise some complicated issues where your IRA is concerned. It is best to be prepared. If you have questions about how community property rules affect your IRA, a good place to start is a consultation with a knowledge financial or tax advisor who knows both the IRA rules and the property transfer rules.

https://irahelp.com/slottreport/what-you-need-to-know-about-community-property-and-your-ira/

ED SLOTT’S ELITE ADVISOR GROUP℠ MEETS IN INDIANA

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

 

Ed Slott’s Elite IRA Advisor Group℠ gathered in Indianapolis last week for another successful conference. Over 350 member advisors from across the country spent two intense days of training, covering topics ranging from SECURE 2.0 provisions taking effect in 2024 to fixing excess contributions. The overarching theme of the seminar was “schemes and scams.” Guest speakers discussed different types of scams and what to watch out for. Attending advisors shared real-life stories of how their clients have been targeted and what hurdles had to be overcome to protect accounts. Here we discuss some of the topics of conversation from the conference.

From a recent article on the “Checkpoint” tax service, “An estimated $10 billion from 2.6 million fraud incidents was lost in 2023…but the [Federal Trade Commission] estimates actual losses are as high as $48 billion.”

In the “Identifying Schemes and Scams” portion of the program, we covered seven red flags along with specific situations where the red flag scams resulted in prohibited transactions and significant penalties. These “red flags” included such things as: using multiple entities to conceal illegal transactions within an IRA; making unrealistic claims; and using legal tax breaks to make an investment opportunity sound legitimate. The ultimate point of this section of the program was to emphasize the old adage: “If it sounds too good to be true, it probably is.” In fact, a quote included in the training manual reads as follows:

“There is no secret trick that can eliminate a person’s tax obligations. People should be wary of anyone peddling any of these scams.” – [Former] IRS Commissioner Douglas Shulman, “IRS Issues Dirty Dozen List of Tax Scams”

Apart from the schemes and scams, we also covered the different provisions of SECURE 2.0 that came on-line in 2024. (SECURE 2.0 included 92 sections with staggered effective dates.) Some of the rules include three new ways to potentially access retirement dollars while avoiding the 10% early distribution penalty (Emergency expenses, domestic abuse, and “in-plan emergency savings accounts”). 529-to-Roth IRA rollovers were discussed, as was the ability to exempt Roth plan dollars – like in a 401(k) – from the lifetime required minimum distribution calculation.

One of the more focused parts of the conference had to do with Roth SEP and Roth SIMPLE contributions. Roth contributions to both types of plans were technically available in 2023, as per SECURE 2.0. However, actual implementation proved difficult. For example, how are Roth SEP contributions reported? Since custodians needed further guidance from the IRS on how to handle such contributions before they could proceed, the new Roth options were simply not offered. That guidance arrived in the form of IRS Notice 2024-2, which we have written about in the past here in the Slott Report. We now know the answer to the above question: Roth SEP contributions are reported on a 1099-R using code 2 or 7 in box 7.

The Ed Slott’s Elite IRA Advisor Group℠ training programs are always jam-packed with important information, intense conversation, networking opportunities and entertainment. Indianapolis proved to be no different. Another successful conference is in the books, and our member advisors fanned back out across the country armed with new information to help guide and protect their clients.

https://irahelp.com/slottreport/ed-slotts-elite-advisor-group%e2%84%a0-meets-in-indiana/

QUALIFIED CHARITABLE DISTRIBUTIONS (QCDS) AND SOLO 401(K) PLANS: TODAY’S SLOTT REPORT MAILBAG

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

 

Question:

Can a QCD (qualified charitable distribution) be made from a 401(k) plan?

Thanks!

Answer:

No, QCDs can only be made from IRAs and inactive SEP or SIMPLE IRAs. One possible workaround would be for you to roll over all or a portion of your 401(k) funds into an IRA and then do a QCD from the IRA.

Question:

We have a client who is self-employed. He has a 401(k) plan for himself and his wife. Is this 401(k) protected under ERISA from creditors?

Answer:

A solo 401(k) plan where just the business owner and spouse participate is not an ERISA plan, so it does not have ERISA protection against non-bankruptcy creditors. The plan would only have whatever creditor protection is available under state law. (The federal Bankruptcy Code does protect solo plan accounts in bankruptcy.) Hiring additional employees would turn the solo plan into an ERISA plan with ERISA creditor protection. But having an ERISA plan would also introduce new administrative requirements.

https://irahelp.com/slottreport/qualified-charitable-distributions-qcds-and-solo-401k-plans-todays-slott-report-mailbag/

A CHEAT SHEET FOR IRA BENEFICIARY RMDS

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

 

It’s been over four years since the SECURE Act upended the rules for beneficiary IRA required minimum distributions (RMDs), and there’s still plenty of confusion about the new rules. The IRS did give us proposed SECURE Act regulations in February 2022, but those rules still haven’t been finalized. They have also raised a lot of new questions.

Here’s a cheat sheet on how the rules currently stand for IRAs inherited after 2019. (Pre-SECURE Act rules apply for IRAs inherited before 2020.)

Two Important Questions

First, we always need to answer two important questions:

  • Did the IRA owner die before or after his required beginning date (RBD) for RMDs? The RBD is April 1 of the year following the year IRA owner reaches his first RMD year. (The first RMD year is age 73 under SECURE 2.0.) A Roth IRA owner is always considered to have died before her RBD.
  • Is the IRA beneficiary an eligible designated beneficiary (EDB), a non-eligible designated beneficiary (NEDB) or a non-designated beneficiary (NDB). An EDB is a surviving spouse of the IRA owner; a minor child (under 21) of the IRA owner; a chronically-ill or disabled person; or someone not more than 10 years younger than the IRA owner. An NEDB is an individual beneficiary who isn’t an EDB. An NDB is a beneficiary who isn’t a person (e.g., an estate, a charity or certain trusts).

Traditional IRA Owner Died Before Required Beginning Date OR
Roth IRA Owner Died At Any Time

EDB: A non-surviving spouse EDB can elect to stretch RMDs over her life expectancy or have the 10-year payment rule apply. If the 10-year rule is elected, the entire account must be emptied by 12/31 of the 10th year following the year of death. However, no annual RMDs are required during the 10-year period. Note: There are different rules for surviving spouse EDBs who inherit after 2023.

NEDB: The 10-year rule applies, but no annual RMDs are required.

NDB: The 5-year rule applies. So, the entire account must be emptied by 12/31 of the 5th year following the year of death, but no annual RMDs are required during the 5-year period.

Traditional IRA Owner Died On or After Required Beginning Date

EDB: Stretch RMDs apply. But if the EDB is older than the deceased IRA owner, the EDB can use the deceased person’s older life expectancy in calculating RMDs. (However, the inherited IRA must be emptied when the EDB’s life expectancy runs out.)

NEDB: The IRS proposed regs say that both the 10-year rule applies and annual RMDs during the 10-year period are required. However, because of widespread confusion, the IRS has waived the annual RMD requirement for 2021, 2022, 2023 and 2024 in this situation.

NDB: AnnualRMDs must continue over the deceased IRA owner’s remaining single life expectancy had he lived (the “ghost rule”).

https://irahelp.com/slottreport/a-cheat-sheet-for-ira-beneficiary-rmds/

YOUR RMD IS NOT ELIGIBLE FOR ROLLOVER

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

 

If you are at retirement age, you might be at a high risk for excess contributions due to rollover mistakes. This is because of the rule that says that the required minimum distribution (RMD) for the year cannot be rolled over. In fact, the RMD for the IRA must be taken before any of the funds in the IRA are eligible for rollover. For example, an RMD must be taken before doing a Roth IRA conversion.

If you mistakenly roll over an RMD, you will end up with an excess contribution. Very often, many people think they can fix the problem by simply taking a distribution from the IRA that received the failed rollover. Not so fast! It’s not that easy. The RMD was distributed. That part went fine. However, because the RMD should not have been rolled over, it is considered an excess contribution and must be fixed as an excess contribution.

Sometimes the failed rollover is not due to a mistake on your part. Sometimes the mistake may be the fault of the plan administrator handling a rollover from a company plan to your IRA. If ineligible dollars are included in the amount rolled over to the IRA, an excess contribution in the IRA is the result.

Roth IRA conversions are considered rollovers. If you mistakenly include your RMD in a conversion instead of taking it first, you will end up with an excess contribution in your Roth IRA.

Correcting an RMD That Becomes an Excess Contribution

If you have mistakenly rolled over your RMD, do not panic. This is a mistake that can be fixed without penalty if you act in a timely manner. If you correct the excess contribution, by removing it, plus net income attributable, by October 15 of the year following the year of the contribution, you can avoid the 6% excess contribution penalty.

Example:  Carla, age 75, has not taken her 2024 RMD of $9,000. She rolls over her entire IRA balance to a new IRA. Carla’s RMD of $9,000 is considered an excess contribution in the receiving IRA. This problem cannot be fixed by Carla simply taking a distribution of $9,000 from the new IRA. She will have to correct the excess contribution. If Carla removes the $9,000, plus the net income attributable as a corrective withdrawal by October 15, 2025, she will avoid the 6% penalty that applies to excess contributions.

https://irahelp.com/slottreport/your-rmd-is-not-eligible-for-rollover/

ROLLOVERS AND SUCCESSOR BENEFICIARY RULES: TODAY’S SLOTT REPORT MAILBAG

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

 

QUESTION:

My client is terminating employment and rolling over the funds from his 401(k). He was told that the funds must be rolled over to a “rollover IRA” and kept separate from any other IRA funds that he has. He already has another IRA, and he just wants to roll over the funds to that IRA. Is that allowed?

Thanks,

Jim

ANSWER:

Jim,

Yes, your client is allowed to roll his 401(k) into his existing IRA. There is no downside to commingling former 401(k) dollars with IRA dollars.

QUESTION:

I inherited an IRA from my brother. I have named my wife as the beneficiary on this IRA. Can she do a spousal rollover to her own IRA after my death?

ANSWER:

No, a spousal rollover is not an option. If your wife were to inherit this inherited IRA from you, that would make her a “successor” beneficiary. As a successor, she must follow the applicable rules established by the SECURE Act for deaths after 2019. Regardless of who the successor beneficiary is, the 10-year rule will apply, and the successor will continue with the same required minimum distribution (RMD) schedule as the original beneficiary in years 1 – 9. (The account must be emptied by the end of year 10.) For situations where the 10-year rule had already begun with the first beneficiary, the successor can only continue whatever time remains on the original 10-year period.

https://irahelp.com/slottreport/rollovers-and-successor-beneficiary-rules-todays-slott-report-mailbag-2/

ONE 60-DAY ROLLOVER PER YEAR?

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

 

SCENARIO: In one calendar year, Jessie completes the following transactions:

1. Takes a partial distribution from her 401(k) and does a 60-day rollover to an IRA.

2. Does a 60-day rollover from one traditional IRA to another traditional IRA.

3. Takes another partial distribution from her 401(k) and, within 60 days, deposits the cash directly into a Roth IRA.

4. Takes a distribution from her traditional IRA and, within 60 days, deposits the cash directly into a Roth IRA.

5. Closes out her 401(k) and does a 60-day rollover of remaining plan assets to a traditional IRA.

QUESTION: Has Jessie violated the one-rollover-per-year rule?

ANSWER: No, she has not.

EXPLANATION: The one-per-year rollover rule works as follows: First, it is true that a person can do only one 60-day rollover per year. The rule gets even more strict when you realize it is applicable across all accounts. Also, “per year” is not a calendar-year 12-months, but a rolling 365 days. For example, if a person receives an IRA distribution on May 1 and does a 60-day rollover to another IRA, she is not eligible to do another 60-day rollover from any IRA to another IRA until the following May 1. (Note that the 12-month period begins with the date the funds are received by the account owner.)

However, the finer details of the one-per-year 60-day rollover rule are important so as to be able to maximize the legal movement of funds. The following rollovers ARE subject to the rule:

  • IRA to IRA
  • Roth IRA to Roth IRA

The following rollovers are NOT subject to the rule:

  • Plan to IRA
  • IRA to Plan
  • IRA to Roth IRA (a Roth conversion)

In fact, of the five transactions completed by Jessie listed above, only item #2 was subject to the one-rollover-per year rule. An analysis of each transaction is as follows:

1. Plan-to-IRA rollover. Not subject to the one-per-year rule. A person can do as many plan-to-IRA 60-day rollovers as they wish.

2. IRA-to-IRA rollover. As mentioned, this is Jessie’s only transaction subject to the rule. She cannot do another IRA-to-IRA (or Roth IRA-to-Roth IRA) 60-day rollover for 365 days.

3. Plan-to-Roth IRA. This transaction qualifies as a valid Roth conversion.

4. IRA to Roth IRA. Also, a valid Roth conversion.

5. Plan-to-IRA. No restrictions on these transactions.

https://irahelp.com/slottreport/one-60-day-rollover-per-year/

401(K) RMDS IN THE YEAR OF RETIREMENT

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

 

Here’s a question we get asked often: Say you retire in the year you turn age 73 (or in a later year) and you want to roll over your 401(k) funds to an IRA. Do you have to take a required minimum distribution (RMD) before rolling over the remaining funds?

The answer is yes, but at first glance that doesn’t seem right. After all, RMDs normally don’t need to start until April 1 following your age 73 year (or April 1 following the year of retirement if you’re using the “still-working exception” to delay RMDs). That April 1 is considered your required beginning date (RBD) for RMDs. If the 401(k)-to-IRA rollover takes place before the RBD, why would an RMD be required?

It would be required because of the interplay between three tax rules. First, the first funds paid to you in a year for which an RMD is required are considered part of the RMD (the “first-dollars-out rule”). Second, the first year for which an RMD is required is not the year of the RBD – it’s the year of retirement (that is, the year before the year of the RBD). Third, RMDs can never be rolled over. Putting all these rules together means that the first dollars received in the year you retire on or after age 73 are part of the RMD and aren’t eligible for rollover.

What if the RMD is rolled over? Then, you have an excess IRA contribution. But that’s not as bad as it sounds. As long as the rolled-over amount – along with earnings or losses attributable to the excess amount (“net income attributable” or “NIA”) – are withdrawn from the IRA by October 15 of the year after the year of the rollover, you won’t have a penalty.

Example: Tara participates in her company’s 401(k) plan. She uses the still-working exception to delay plan RMDs beyond age 73. In 2025 at age 74, Tara retires and wants to roll over her 401(k) balance of $400,000 to an IRA. She is aware that her RBD for plan RMDs is not until April 1, 2026. So, she rolls over the entire $400,000. However, because her 2025 RMD (assume $15,000) wasn’t eligible for rollover, she now has an excess contribution in the IRA. Tara can fix the error without penalty by withdrawing the $15,000, along with the NIA, from the IRA by October 15, 2026.

Is there a workaround for Tara to avoid taking a 2025 RMD from her 401(k) in calendar-year 2025 if she retires that year? Yes, by keeping her 401(k) funds in the plan and delaying the rollover until 2026. But then she would have to take two taxable RMDs in 2026 – the 2025 RMD and the 2026 RMD – before rolling over the rest of her funds.

https://irahelp.com/slottreport/401k-rmds-in-the-year-of-retirement/

INHERITED IRAS AND QUALIFIED CHARITABLE DISTRIBUTIONS: TODAY’S SLOTT REPORT MAILBAG

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

 

Question:

My brother died in 2020 and made me the beneficiary of an IRA he inherited from my sister who died in 2017. Can I continue to stretch the payments from this inherited IRA? If not, how soon do I have to empty it?

Thanks,

Dave

Answer:

Hi Dave,

It sounds like you are a successor beneficiary on this inherited IRA. Your brother was the original beneficiary, and he would have been eligible to use the stretch.

You inherited after the SECURE Act, so as a successor beneficiary you are subject to the 10-year rule and must empty the account by the end of 2030. Under the IRS proposed regulations, you would be required to continue the annual RMDs that your brother was taking when he was the beneficiary and subject to the stretch. However, due to continued confusion over the regulations, those RMDs have been waived by the IRS for years 2021 through 2024.

Question:

I am beneficiary of an IRA inherited from my father who died over 10 years ago. I’ve been taking RMDs as required. Since I’m over age 70 ½, I did some QCDs. I received proper documentation from the charities.

I use tax software to prepare my taxes.  It’s not allowing me to recognize the QCDs. Is there a problem with my doing a QCD from an inherited IRA?

Thanks for your help!

Answer:

There is no problem with doing a QCD from an inherited IRA. If you a beneficiary who is over age 70 ½, that is allowed.

It is hard to say what the problem is with the tax software. There is nothing on the Form 1099-R which the IRA custodian generates when a QCD is done that would distinguish a QCD from any other distribution. You must claim the QCD on your tax return. Most tax software programs should be able to handle this.

https://irahelp.com/slottreport/inherited-iras-and-qualified-charitable-distributions-todays-slott-report-mailbag-2/

3 QUESTIONS TO ASK TO DETERMINE IF AN HSA IS RIGHT FOR YOU

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

The cost of healthcare continues to climb. Are you frustrated with higher premiums and out-of-pocket costs? You are not alone. You may be looking for new strategies to handle these expenses. If you have not considered a Health Savings Account (HSA) before, now may be the time. Here are 3 questions to ask to determine if an HSA is right for you.

1: Who is eligible to have HSA? To be eligible to make an HSA contribution, under the current rules you must be covered by a high deductible health plan (HDHP). The rules are very specific about what plans qualify. Here are the details for 2024:

  Year     Self-Only HDHP Minimum Deductible   Self-Only HDHP Maximum Out-of-Pocket Expenses   Family HDHP Minimum Deductible   Family HDHP Maximum Out-of-Pocket Expenses
2024 $1,600 $8,050 $3,200 $16,100

If you have questions as to whether your plan qualifies, you should ask your employer or health insurance provider. You cannot contribute to an HSA once you are enrolled in Medicare. However, you can keep your existing HSA and you can still take tax-free distributions for qualified medical expenses.

2: How do the HSA contribution rules work? Your contribution limit will depend on your age and the type of health insurance you have. The HSA contribution limits are indexed for inflation. Here are the limits for 2024:

Year   Self-Only HDHP under age 55 Self-Only HDHP age 55+ Family HDHP under age 55 Family HDHP age 55+  
2024 $4,150 $5,150 $8,300 $9,300

There are currently no income limits for HSA contributions, and you do not need to have earned income to contribute. If you make an HSA contribution, you may deduct that contribution regardless of how high your income is and regardless of whether you take the standard deduction or itemize deductions on your tax return.

3: How do the HSA distributions rules work? You can take tax-free distributions from your HSA for qualified medical expenses, including those of a spouse or dependent. This is true even if your spouse or child is not covered under the HSA compatible HDHP. You can take a tax-free distribution from an HSA to reimburse yourself for qualified medical expenses in prior years as long as the expenses were incurred after you established your HSA and you have proof of those expenses.

https://irahelp.com/slottreport/3-questions-to-ask-to-determine-if-an-hsa-is-right-for-you/

FUNDAMENTALS OF THE LIFETIME RMD

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

 

We answer some pretty complex IRA and retirement plan questions. Our newsletters and other Slott Report entries can get into the weeds on some tricky topics. The thing is, when you spend all your time in the deep end, it’s easy to forget there are new swimmers in the shallows, testing the waters for the first time. Additionally, seasoned financial advisors are not immune to forgetting some basic concepts. Since lifetime required minimum distributions (RMDs) are so prevalent, a refresher course is in order.

When a traditional IRA owner or retirement plan participant reaches a certain age (or employment status, discussed below), then RMDs must begin. That age has been adjusted a few times over the last couple of years, and it will move again (to age 75) in 2033. To best understand what RMD age applies to you, use your date of birth, as follows:

Born 1950 or earlier?                 Your RMD age was 70 ½ or 72.

Born from 1951 – 1959?            Your RMD age is 73.

Born 1960 or later?                   Your RMD age is 75.

Your first RMD year is the calendar year in which you turn one of the ages listed above. It does not matter if your actual birthday is January 1 or December 31. The year you turn the applicable RMD age is your first year for RMDs.

The first RMD can be taken any time during the year. You do not need to wait until your birthday. Additionally, the first RMD (and the first RMD only) can be delayed until April 1 of the year after the first RMD year. This is known as the “required beginning date,” or “RBD.” The purpose of the delay is to give first-time RMD takers a few extra months to figure things out. But be forewarned. If you delay your first RMD until the following year, you will have to take two RMDs in that second year – the first RMD by April 1, and the second RMD by December 31.

If your work plan – like a 401(k) – offers the “still-working exception,” and if you are still working, you can delay your first RMD until the year you separate from service. This final year of employment will act in the same manner as a standard first RMD year (like turning age 73). Meaning, the first RMD from the work plan can be delayed until April 1 of the year after you retire/separate from service. (Note that the still-working exception is NOT available to more than 5% owners of the company sponsoring the 401(k). It also does NOT apply to IRAs.)

IRAs can be aggregated for RMD purposes. RMDs from all of a person’s IRAs must be calculated separately, but the total combined RMD amount can be taken from one or a combination of the IRAs. But not all RMDs from all accounts can be aggregated. Inherited IRAs cannot be aggregated with a person’s own IRAs. Also, work plan RMDs – again, like a 401(k) – cannot be aggregated with your IRA. Finally, spouses cannot aggregate RMDs with RMDs from the other spouse’s IRAs.

The Uniform Lifetime Table is typically used to calculate lifetime RMDs. (The Joint Life and Last Survivor Table is only for spouses with more than a 10-year age difference, and the Single Life Table is for beneficiaries.) Look up your age and find the corresponding factor. Divide that factor into the December 31 balance from the previous year, and voila, your RMD is calculated. (Now just be sure to take it before whichever deadline applies!)

https://irahelp.com/slottreport/fundamentals-of-the-lifetime-rmd/

ROTH IRA DISTRBUTION RULES AND COMBINING IRAS: TODAY’S SLOTT REPORT MAILBAG

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

 

Question:

Can you please clarify a question I have about whether I should take a Roth IRA withdrawal?

I am much older than age 59 ½, and my first Roth IRA was opened over 20 years ago. I now own a second Roth which holds recently converted funds from my 403(b) account. I am planning to make added Roth conversions over the next couple of years and pay the tax on these conversions. If I make a subsequent withdrawal from my Roth IRA, will it be tax- and penalty-free? I think so from what I have read, given my age and the fact that my first Roth account was opened over 5 years ago. However, some commentators seem to think that any Roth withdrawal must wait 5 years from the conversion in order to avoid being taxed on earnings. I don’t think this is correct and hope you can help.

Paul

Answer:

Hi Paul,

The Roth IRA distribution rules are confusing. You are correct that any Roth IRA withdrawal you take will be completely free of taxes and the 10% early distribution penalty. That’s because you are over 59 ½ and have had a Roth IRA for at least 5 years. The rule about waiting 5 years to withdraw a Roth conversion only applies to the 10% penalty (not taxation of earnings) and doesn’t apply to folks over 59 ½ like you.

Question:

I have a client with a traditional IRA and a SIMPLE IRA opened in 2020 that she is no longer contributing to. Should these accounts remain separate? She also has a small 401(k) that she needs to roll over to an IRA. Can all of these accounts be consolidated?

Answer:

There is no reason why the traditional IRA and SIMPLE IRA can’t be combined. (SIMPLE IRAs can be rolled over to non-SIMPLE accounts after 2 years of participation in the SIMPLE.) And, the 401(k) can also be rolled over into the combined traditional/SIMPLE account.

https://irahelp.com/slottreport/roth-ira-distrbution-rules-and-combining-iras-todays-slott-report-mailbag/

IRS WAIVES 2024 RMDS FOR IRA BENEFICIARIES SUBJECT TO THE 10-YEAR RULE

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

If you’re an IRA beneficiary subject to the 10-year payout period and would have had a 2024 required minimum distribution (RMD), you’re in luck. In IRS Notice 2024-35, issued yesterday (April 16), the IRS said it would excuse those RMDs.

The SECURE Act provided that most non-spouse beneficiaries of IRA owners (or plan participants) who died in 2020 or later could no longer stretch RMDs over their lifetime. Instead, these “non-eligible designated beneficiaries” became subject to a 10-year payment rule. In its proposed SECURE Act regulations (from February 2022), the IRS surprised everyone by saying that, in addition to the 10-year payout, annual RMDs are required in years of 1-9 of the 10-year period if the IRA owner had died on or after the date his RMDs were required to begin. That required beginning date (RBD) is generally April 1 of the year after the year the owner turns 73.

The IRS position led to widespread criticism and confusion. Recognizing this, the IRS previously excused 2021, 2022 and 2023 annual RMDs for beneficiaries of IRA owners who died in 2020 after the RBD. It also previously waived 2022 and 2023 annual RMDs for beneficiaries who inherited in 2021 after the owner’s RBD. And, it has excused 2023 annual RMDs for beneficiaries who inherited in 2022 after the owner’s RBD.

With Notice 2024-35, this relief within the 10-year payout period is extended even further. The new Notice adds another year of relief by waiving 2024 annual RMDs for beneficiaries of IRA owners who died in 2020, 2021 or 2022 after the RBD. It also excuses 2024 RMDs within the 10-year period for beneficiaries of owners who died in 2023 after the RBD.

So, if you inherited after 2019 and are subject to the 10-year payout rule, you aren’t required to receive annual RMDs for any year before 2025. Even so, it may be a good idea to voluntarily take IRA withdrawals while tax rates are low. Putting off distributions also could mean you’ll face a larger tax bill at the end of the 10-year period.

Keep in mind that the new IRS Notice does not affect lifetime RMDs, RMDs from inherited IRAs by “eligible designated beneficiaries,” or RMDs by beneficiaries who inherited before 2020. It only applies to those beneficiaries with annual RMDs within the 10-year period.

Notice 2024-35 also suggests that, after more than two years, the IRS may finally be ready to finalize its February 2022 proposed regulations sometime later this year.

https://irahelp.com/slottreport/irs-waives-2024-rmds-for-ira-beneficiaries-subject-to-the-10-year-rule/

TWO RMD STRATEGIES TO AVOID IRMAA

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

You have carefully saved for retirement and now you have accumulated a substantial amount of funds in your IRA.  At some point the funds that you have been putting away for years must come out. When you reach age 73 you must take a required minimum distribution (RMD) for that year and for every year thereafter.

You may be concerned about the tax hit that the RMD will bring. Besides the RMD itself being taxed, there is a ripple effect when an RMD is taken. An RMD is included in income for the year it is taken. A bump up in your income can negatively affect the availability of deductions and can impact the taxation of Social Security. One significant negative impact of an RMD may be increased Medicare costs. This is often not paid the attention it deserves by many IRA owners until it is too late.

Increased Medicare Costs

Without careful planning, your RMD can result in much higher healthcare costs. This is because the RMD is included in your modified adjusted gross income (MAGI) that is used to determine your Medicare Part B and Part D costs two years down the road. The income-related monthly adjustment amount (IRMAA) sliding scale is a set of tables used to adjust Medicare premiums. The higher the MAGI, the higher the IRMAA. There are no phaseout ranges. If you have MAGI that is $1 over the limits, you will have to pay the full extra amount. This can be a significant amount.

How can you avoid falling into the trap of higher Medicare costs due to RMDs? Here are two strategies to consider:

1: Convert to a Roth IRA.

One way to avoid IRMAA problems due to RMDs is to eliminate RMDs. If you are in your early sixties you may want to consider converting to a Roth IRA sooner rather than later. You will want to get the conversion done before the income from the conversion would affect your MAGI for Medicare purposes. (Income in the year you turn 63 impacts IRMAA brackets in the year you turn 65.) By doing so, you can then minimize the impact of RMDs on Medicare costs.  This is because RMDs will not be needed. RMDs are not required from Roth IRAs during the Roth IRA owner’s lifetime. In addition, any qualified Roth IRA distributions are not included in MAGI for Medicare purposes.

2: Do a QCD.

If you are already taking RMDs, a qualified charitable distribution (QCD) is another strategy you may consider to minimize the impact of RMDs from an IRA on Medicare costs. With a QCD, you can transfer up to $105,000 annually from your IRA to a charity tax-free. A QCD can satisfy your RMD for the year and it is not included in MAGI for determining Medicare costs. Keeping the RMD amount out of MAGI can result in big savings. This is not the case if you take your RMD and then donate to charity and claim a charitable deduction. With that approach, the RMD would still be included in MAGI.

https://irahelp.com/slottreport/two-rmd-strategies-to-avoid-irmaa/

REQUIRED MINIMUM DISTRIBUTIONS AND QUALIFIED CHARITABLE DISTRIBUTIONS: TODAY’S SLOTT REPORT MAILBAG

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

 

QUESTION:

Dear IRA Help,

My mother passed away in April of 2023 and no required minimum distribution (RMD) was taken. The entire IRA account was paid out to the charity that was the beneficiary. Was there a requirement to take the RMD?

Joe

ANSWER:

Joe,

Our condolences on the loss of your mother. Yes, she did have a year-of-death RMD, and the year-of-death RMD is the responsibility of the beneficiary. Since the beneficiary, in this case, was the charity, and since the charity received a full distribution of the IRA, then all is well. The 2023 year-of-death RMD was included in the lump sum distribution to the charity.

QUESTION:

Can qualified charitable distributions (QCDs) be taken from an inherited IRA? I have my own traditional IRA that I have been taking QCDs from. If I take the QCDs from my inherited IRA only, do I need to wait to take my RMD from the traditional IRA until after the QCDs have cleared from the inherited IRA?

ANSWER:

Inherited IRAs operate completely independently from a person’s own IRAs. Meaning, RMDs between the two cannot be aggregated. Distributions from one account have no impact on distributions from the other. As such, you do not need to wait for any transactions to clear from one account before transacting on the other. Assuming you meet all the normal QCD requirements (like being age 70 ½), then yes, QCDs can be done from your inherited IRA. As mentioned, the timing of these QCDs has no impact on the RMD requirements from your own IRA. The only overlap is that the total annual QCD limit is $105,000 for 2024, aggregated across all IRA accounts.

https://irahelp.com/slottreport/required-minimum-distributions-and-qualified-charitable-distributions-todays-slott-report-mailbag/

THE WISE SHOPPER – ROTH CONVERSIONS

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

 

Imagine walking through a grocery store, intent on purchasing a specific item. As you turn down an aisle, little colorful tags proclaiming “Special Deal” and “Buy 1, Get 1” protrude from each shelf. In anticipation of your item being offered at a discounted price, you get a little bounce in your step. Sure enough, as you reach the section that displays the one product you came here to buy, the tag says, “On Sale.” Jackpot! And if this is a non-perishable item that can be safely stored at home or frozen, there is a good chance you might load the grocery cart. (After all, isn’t that the business model for bulk warehouse stores?) And who doesn’t like saving a few bucks?

Guess what’s on sale right now? Taxes. The taxable income brackets for 2024 (ordinary income tax rates) are as follows:

Marginal        Married Filing

Tax Rate         Joint                                       Single

10%                 $0 – $23,200                           $0 – $11,600

12%                 $23,201 – $94,300                 $11,601 – $47,150

22%                 $94,301 – $201,050               $47,151 – $100,525

24%                 $201,051 – $383,900             $100,526 – $191,950

32%                 $383,901 – $487,450             $191,951 – $243,725

35%                 $487,451 – $731,200             $243,726 – $609,350

37%                 Over $731,200                        Over $609,350

It’s that last bracket that’s interesting – 37%. Did you know the top bracket from 1944 to 1963 was 91% – and even went as high as 94%? In 1964 it “dropped” to 77%, and from 1965 to 1981 it was 70%. Granted, not everyone falls into the top bracket, but compared to the last 100 years, taxes today are being offered at a discount. But this sale won’t last forever. On January 1, 2026, the rates return to their pre-Tax Cuts and Jobs Act levels of 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.

So, what’s the point? Roth conversions! Would you rather have a $100,000 traditional IRA or a $100,000 Roth IRA? Of course, the answer is a Roth IRA. Why? Because the $100,000 Roth IRA is all yours. The $100,000 traditional IRA has yet to face a tax bite, which means a portion of it belongs to the IRS. If (and when) tax rates increase, that bite will only get larger.

We have two years left (2024 and 2025) before the impending tax bracket reset. (There is no such thing as a “prior year” conversion, so the ship has sailed on 2023.) If you can afford the tax bill from a non-qualified source, it is highly recommended you consider a Roth conversion. (Yes, paying the taxes due from the IRA is an option, but covering the costs from another account will maximize the conversion.)

Back to the grocery store. Would you bypass the little “On Sale” sign and voluntarily choose to come back when the price of your item had increased? That would be illogical. Likewise, tax bracket history tells us the chances of Roth conversions being offered at a deeper discount are slim. Now is the time to pull out your wallet and make the purchase. Your future wise-shopper self will thank you for it.

https://irahelp.com/slottreport/the-wise-shopper-roth-conversions/

JUST A FEW DAYS LEFT TO FIX 2023 EXCESS 401(K) DEFERRALS

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

If you exceeded the 2023 limit for 401(k) deferrals, time is of the essence to correct the error. If you don’t act quickly, the tax consequences can be serious.

The maximum amount of pre-tax and Roth contributions you could make for 2023 was $22,500 (plus $7,500 more if you were least age 50). In applying that limit, contributions you make to ALL plans are combined. (There’s an exception if you participate in both a 401(k) plan and 457(b) plan.)

Most plans have internal controls to prevent you from exceeding the deferral limit in that plan. If the plan mistakenly allows you to overcontribute, it’s up to the plan to fix the problem.

But it’s a different matter if you were in two different plans during the year (because you had two jobs at the same time or changed jobs). One plan had no way of knowing how much you contributed to the other plan. So, the burden is on you to keep track. Your W-2 from each employer indicates the amount of pre-tax and Roth contributions in Box 12. Or, you can check your plan account statements.

If you’ve overcontributed, contact the administrator of one of the plans immediately and make them aware of the problem. To avoid double taxation (see below), the error must be fixed by April 15, 2024.

The plan fixes the problem by making  a “corrective distribution” to you. That is the excess amount, adjusted for earnings or losses on the excess. You’ll receive a corrected W-2 that adds back the excess deferrals to your 2023 taxable income. (If you’ve already filed your 2023 tax return, you’ll need to amend it.) Earnings on the excess are taxable to you in 2024.

Example: Kali, age 45, made $15,000 of 2023 pre-tax contributions to Alpha Inc.’s 401(k) plan before leaving Alpha mid-year to work for Beta Inc. Kali didn’t keep track of her total 2023 contributions and made $12,500 of Roth contributions to Beta’s 401(k) – for a total 2023 contribution of $27,500. She exceeded the 2023 deferral limit by $5,000 ($27,500 – $22,500). The excess deferrals earned $800. Kali becomes aware of this problem and contacts the Beta 401(k) administrator. On March 31, 2024, the Beta plan makes a corrective distribution of $5,800 ($5,000 + $800) to her. Beta also sends Kali a corrected 2023 W-2 showing an additional $5,000 of 2023 taxable income. She must include the $800 of earnings as taxable income for 2024.

What if the corrective distribution isn’t paid to you by April 15? You’ll face double trouble. In that case, the excess deferrals won’t be paid to you, but you’ll still have to pay taxes on them as 2023 income. And the excess, along with related earnings, will be taxable to you a second time for the year they are eventually distributed to you.

https://irahelp.com/slottreport/just-a-few-days-left-to-fix-2023-excess-401k-deferrals/

THE 10-YEAR RULE AND INHERITED IRAS: TODAY’S SLOTT REPORT MAILBAG

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

Question:

I have a general question regarding the 10-year time frame for emptying an inherited IRA. Your guidance says that the deadline is the END of the tenth year following death. In this specific situation, the death occurred July 9, 2020, so I believe the deadline is December 31, 2030, the end of the tenth year. I have seen some articles indicating that it is exactly 10 years later (July 9, 2030 in this case), rather than the end of the tenth year.

Would you please clarify this question for me?

Thanks so much for all of your guidance.

Dan

Answer:

Hi Dan,

This was a question that came up often after the SECURE Act established the new 10-year rule for most non-spouse IRA beneficiaries. Guidance from the IRS has now clarified that the 10-year period does end on December 31 of the tenth year following the year of death. So, for the beneficiary of the individual who died on July 9, 2020, the 10-year payout period would end on December 31, 2030.

Question:

I inherited both and a traditional IRA and a Roth IRA from my sister who was one year younger than I am. She was age 80 when she passed in 2021, and had already started taking required minimum distributions (RMDs) on the traditional IRA. I think I am an eligible designated beneficiary because I am not more than 10 years younger than my sister. My question is whether I am required to take a RMD from either or both of these accounts.

Answer: 

For the traditional IRA, because you are an eligible designated beneficiary, you are required to take annual RMDs based on the IRS Single Life Expectancy Table. Because your sister was younger than you, you can use her life expectancy instead of your own.

Roth IRAs work a little differently. With the inherited Roth IRA, you have a choice between taking annual RMDs based on your life expectancy or using the 10-year rule. If you elect the 10-year rule, annual RMDs are not required from the Roth IRA during the 10-year period.

https://irahelp.com/slottreport/the-10-year-rule-and-inherited-iras-todays-slott-report-mailbag/

4 WAYS TO REDUCE YOUR RMD TAX BITE

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

Markets continue to climb. That is good news for your retirement account. However, there is a downside. When you contribute to a traditional IRA or a pre-tax 401(k), you make a deal with Uncle Sam. You can get a tax deduction and tax deferral on any earnings in your account. However, eventually the government is going to want its share and will require funds to come out of these accounts. That is when you must start required minimum distributions (RMDs). You may not need the money, and you may not want the tax hit. Bigger retirement account balances can mean larger tax bills. Here are some strategies that can help reduce your RMD tax bite.

1: Do a Qualified Charitable Distribution (QCD)

If you are planning on giving money to charity anyway, why not do a Qualified Charitable Distribution (QCD) from your IRA? For 2024, if you are age 70 ½, you may transfer up to $105,000 annually from your IRA to a charity tax-free. The QCD can also satisfy your RMD (if the QCD is made before the RMD is taken), but without the tax hit. QCDs are not available from employer plans.

2: Use the Still-Working Exception

Are you still working after age 73? If you do not own more than 5% of the company where you work and the company plan offers a “still working exception,” you may be able to delay taking RMDs from your company plan until April 1 following the year you retire. The still-working exception is not available for IRAs but if your plan allows, you can roll your pre-tax IRA funds to your plan and delay RMDs on these funds too. Just be careful. If you have an RMD for that year from your IRA, you must take it before you can roll over the rest of the funds.

3: Consider a Qualified Longevity Annuity Contract

A Qualifying Longevity Annuity Contract (QLAC) is a product designed to help with longevity concerns. Any funds you invest in the QLAC are not included in your balance when it comes to calculating your RMDs until you reach age 85. This will reduce your RMDs. SECURE 2.0 has changed the rules for QLACs by increasing the dollar limit and doing away with restrictions on the percentage of the account limits. The maximum QLAC limit is now $200,000 per person.

4: Convert to a Roth IRA

If reducing the taxation of RMDs is a top concern for you, you may want to consider a Roth IRA conversion or an in-plan 401(k) conversion. This is because you are not required to take RMDs from your Roth IRA or Roth 401(k) during your lifetime. Keep in mind you will need to take your 2024 RMD from your traditional IRA prior to converting to a Roth IRA. Also, both Roth IRA conversions and in-plan 401(k) conversions are taxable events. There is a big payoff though. You will never have to worry about the tax bite of an RMD ever again.

https://irahelp.com/slottreport/4-ways-to-reduce-your-rmd-tax-bite/

10 POINTS: FIXING EXCESS IRA CONTRIBUTIONS

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

‘Tis the season for identifying and correcting excess IRA contributions. It seems as if every other recent inquiry is about this subject. To keep readers on the straight and narrow, here are ten details about excess IRA contributions and the correction process…

1. Excess contributions occur for many reasons, including exceeding the annual IRA contribution limit, making a contribution without eligible compensation, exceeding the Roth IRA phase-out limits, rolling over ineligible dollars (like a required minimum distribution), rolling over dollars after the 60-day period has expired, etc.

2. The deadline to correct an excess contribution without penalty is generally October 15 of the year after the year of the excess. (October 15, 2024 for a 2023 excess.)

3. Corrections initiated on or before the October 15 deadline avoid the 6% excess contribution penalty and can be made via two ways: withdrawing the excess, plus earnings (called the “net income attributable,” or “NIA”); or recharacterizing the excess plus any gains or losses (i.e., from a Roth IRA to a traditional IRA, or vice versa).

4. NIA is taxable in the year IN WHICH the contribution was made. So, the earnings on an excess contribution made in 2023, even if fixed in 2024, are reportable on the 2023 return.

5. IRS Publication 590-A includes a worksheet to calculate NIA. Earnings are based on overall IRA account performance, not just on the investment where the excess dollars sit.

6. Since corrections made by October 15 of the year after the year of the excess will NOT have a 6% penalty, it is NOT necessary to file IRS Form 5329. Also, there is no penalty on the NIA – only taxes due. (SECURE 2.0 eliminated the 10% penalty on NIA for those under age 59 ½.)

7. After the October 15 deadline, excess contributions can be corrected by withdrawing the contribution or by carrying it forward to use in a future year. Recharacterization is no longer available after the deadline. The 6% penalty applies for each year the excess remains as of December 31. The penalty is paid via Form 5329.

8. After the deadline, the NIA can remain in the account. (Odd, but true.) When a correction is made after October 15, only the excess amount needs to be withdrawn.

9. In situations where an excess contribution remained for many years, the 6% penalty applies for EACH year, and a separate Form 5329 is necessary for each year.

10. SECURE 2.0 created a 6-year statute of limitation for correcting excess IRA contributions. However, in a recent case, the U.S. Tax Court ruled that the statute of limitations is NOT retroactive. This means that IRA owners cannot avoid correcting excess contributions made for years before 2022 — they must be addressed. Bonus info: In the court case mentioned above, the excess contribution was over $25 million, and the applicable penalty was nearly $8.5 million! (We suggest you avoid such situations.)

https://irahelp.com/slottreport/10-points-fixing-excess-ira-contributions/

RMD RULES FOR IRA BENEFICIARIES: TODAY’S SLOTT REPORT MAILBAG

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

Question:

Hi,

My last remaining parent, my mother, passed away in May 2017, and my younger brother and I inherited her IRA (equally split into inherited IRA accounts). We were of the understanding we could handle required minimum distributions (RMDs) via the “stretch IRA” method (RMDs spread out over our expected lifetime). The new laws that went into place in 2020 and 2022 have us wondering if we must change what we are doing. Can you please help us with this question?

Regards,

Eric

Answer:

Hi Eric,

The changes made by the SECURE Act apply only to the beneficiaries of IRA owners who died after 2019. Since your mother died in 2017, you and your brother can continue stretching required minimum distributions (RMDs) under the rules in effect before the SECURE Act.

Question:

Dear Mr. Slott,

I am trying to ascertain whether annual RMDs are required for inherited IRAs. In my case, I am sole beneficiary and not disabled. My mother passed away in March 2020 and had begun RMD withdrawals across all her IRAs. I am age 67.

Thank you,

Tim

Answer:

Hi Tim,

You are considered a “non-eligible designated beneficiary.” Therefore, you must empty your mother’s account by 12/31/30 – the end of the 10th following the year of her death. In 2022, the IRS said that non-eligible designated beneficiaries of IRA owners who died after RMDs started also must receive annual RMDs during years 1-9 of the 10-year period. However, since then the IRS has waived the annual RMD requirement for 2021, 2022 and 2023. So, you aren’t required to take RMDs for those years. Keep checking the Slott Report to see whether 2024 annual RMDs are also waived.

https://irahelp.com/slottreport/rmd-rules-for-ira-beneficiaries-todays-slott-report-mailbag/

ARE 529-TO-ROTH IRA ROLLOVERS SUBJECT TO STATE TAX?

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

Previous Slott Report articles have covered the new SECURE 2.0 provision allowing 529 funds to be rolled over to Roth IRAs. We’ve reported that there are several unanswered questions concerning this new rollover opportunityAnd we’ve discussed the ability to do two rollovers in 2024 – one for 2023 if completed by April 15 and a second by December 31.

Under SECURE 2.0, a Roth IRA contribution of 529 funds must comply with certain requirements. For example, the maximum lifetime amount that can be rolled over is $35,000; the 529 plan must have been open for at least 15 years; the rollover amount cannot exceed the annual Roth IRA contribution limit; and the rollover must be aggregated with “regular” IRA or Roth IRA contributions made for that year. If these rules are met, the rollover is tax-free for federal tax purposes.

However, that’s not necessarily the case for state tax purposes. States are all over the map in their treatment of 529-to-Roth IRA rollovers. Of course, this is not an issue for the 9 states that have no state income tax to begin with: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. (Note that New Hampshire taxes interest and dividends, and Washington state taxes some long-term capital gains.)

The following information comes from a very useful website run by Paul Curley, CFA: Status Board: State Income Tax Treatment on 529 Distributions to Roth IRAs (529conference.com) and is current as of March 13, 2024:

There are 21 states that have said that they will follow federal law: Alabama, Arizona, Delaware, Georgia, Hawaii, Idaho, Kansas, Kentucky, Maine, Maryland, Nebraska, New Mexico, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, South Carolina, Virginia, West Virginia and Wisconsin.

Many states allow residents to take a state tax deduction or credit for 529 contributions made to that state (or, in some cases, to any state’s) 529 plan. Of those states, 10 have indicated that 529 savers may be subject to state income tax “recapture” if 529 funds are transferred to Roth IRAs. This means residents of these states who took a state tax deduction or credit would have to pay it back if they do a 529 rollover. These states are: Illinois, Indiana, Iowa, Massachusetts, Michigan, Minnesota, Montana, New York, Utah and Vermont.

California stands alone. Its residents who do a 529-to-IRA rollover will be subject to state income tax and an additional 2.5% California tax on earnings. (California does not allow a state tax deduction for 529 contributions.)

Finally, in 9 other states, plus the District of Columbia, either the state tax issue is not clear or a decision is pending: Arkansas, Colorado, Connecticut, Louisiana, Mississippi, Missouri, New Jersey, Oklahoma and Rhode Island.

Keep checking Paul Curley’s website for updates.

https://irahelp.com/slottreport/are-529-to-roth-ira-rollovers-subject-to-state-tax/

TWO CAUTIONS WHEN DOING A BACKDOOR ROTH CONVERSION

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

You might be thinking about contributing to a Roth IRA. One big hurdle to making these contributions is the fact that there are income limits that make high income individuals ineligible. For 2024, the phase out range for eligibility for Roth IRA contribution is between $230,000 – $240,000 for those who are married filing jointly and between $146,000 – $161,000 for single filers.

If you are a high earner, you may be able to get around the pesky income limits by using the backdoor Roth IRA conversion strategy. To do this, you make a nondeductible traditional IRA contribution and then convert those funds to a Roth IRA. This strategy works because there are no income limits for traditional IRA contributions or Roth IRA conversions like there are for contributions made directly to a Roth IRA.

When doing a backdoor Roth IRA conversion, here are two important cautions to keep in mind:

1. You or your spouse must have earned income – such as wages or self-employment income. The backdoor Roth IRA conversion strategy starts with a nondeductible traditional IRA contribution. This contribution is subject to all the normal IRA contribution rules. One of these rules is that earned income is required. However, a non-earning spouse can use a working spouse’s earned income to make her own IRA contribution.

Example 1: Jose is age 75, still working and married. His wife is age 73 and retired. Jose will earn $25,000 in 2024. Assume their joint income exceeds the Roth IRA contribution limits. Jose can contribute $8,000 (including the $1,000 catch-up amount) to his nondeductible IRA, and his wife can contribute $8,000 to her nondeductible IRA even though she has no earnings. She can qualify using John’s earnings as long as they are married and file a joint tax return. Once they each contribute to their nondeductible traditional IRAs, they can each convert those IRAs to Roth IRAs shifting a combined $16,000 to their respective Roth IRAs.

2. Your backdoor Roth IRA conversion may be subject to the pro-rata rule.  A backdoor Roth IRA conversion is considered a distribution from the traditional IRA and a conversion deposit to the Roth IRA. Whenever you take a distribution from one of your traditional IRAs, all of your owned traditional IRAs, including SEP and SIMPLE IRAs, are included in a pro-rata calculation that determines how much of your distribution is tax-free. When any of your IRAs contains both nondeductible and deductible funds, then each dollar withdrawn from any IRA will contain a combination of tax-free and taxable funds based on the percentage of after-tax funds to the entire balance in all your IRAs.

Example: Grace, age 37, is single, and her income is too high for her to contribute directly to a Roth IRA for 2024. She decides to use the backdoor Roth IRA conversion strategy. She makes a non-deductible contribution of $7,000 to a traditional IRA and then converts the funds to a Roth IRA. Grace also has a SIMPLE IRA from a previous employer. Grace’s backdoor Roth IRA conversion will be partially taxable because the pro-rata rule will apply.

https://irahelp.com/slottreport/two-cautions-when-doing-a-backdoor-roth-conversion/

REQUIRED MINIMUM DISTRIBUTIONS AND ELIGIBLE DESIGNATED BENEFICIARIES: TODAY’S SLOTT REPORT MAILBAG

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

QUESTION:

I know you can delay taking your first required minimum distribution (RMD) until April 1 of the year after you turn age 73. If you convert your entire IRA into a Roth before that date, but after you turn age 73, do you still have to take your first RMD distribution? Or is no distribution required as the entire IRA is converted prior to April 1 of the following year?

Best regards,

Tom

ANSWER:

Tom,

Once you hit January 1 of the year you turn age 73, there is no avoiding the RMD. Converting the entire IRA prior to turning age 73 that same year, or even before April 1 of the year after you turn age 73, does not help. The RMD will need to be taken prior to any conversion. If the RMD is erroneously converted, it will be an excess contribution in the Roth and will need to be removed.

QUESTION:

I have a question about an inherited traditional IRA. The definition of an “eligible designated beneficiary” (EDB) includes any individual who is “not more than 10 years younger than the IRA owner.”  What about a person who is older than the original owner? Is such a person an EDB?

ANSWER:

You are correct that one of the ways to qualify as an EDB is to be not more than 10 years younger than the IRA owner. This also includes anyone who is older than the IRA owner. Consider it this way: Subtract 10 years from your age. Anyone in the world who is that age or older qualifies as an EDB on your IRA.

https://irahelp.com/slottreport/required-minimum-distributions-and-eligible-designated-beneficiaries-todays-slott-report-mailbag/

WHAT IS RETIREMENT? FANTASY VS. REALITY

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

 

Three times a week, every week, we add to the Slott Report. Two article entries and a mailbag. All factual, measurable information. “This is what to consider when you name a trust as your beneficiary.” “How much can a sole proprietor contribute to a SEP account?” “This is how you fix an excess IRA contribution.” On and on it goes. All excellent, helpful material.

But what is the end game? Why do we wade through the morass of IRS rules and complicated legislation and oftentimes fantastically dry data? It is an overall effort to help people reach and create a “successful retirement.” But what does that mean? What is retirement? Fantasyland says a person works a job for 40+ years and saves a little annually through IRA contributions and 401(k) salary deferrals. And when this person stops working at age 65, he can ride off into the sunset and do all the things he wanted to do previously, but could not because he was tied to a desk or a mop or a piece of heavy construction equipment.

A few people may still fall into this category — workers who maintain steady employment at a single company followed by blissful retirement. But that ain’t the case for most of us. Research shows the average person will have 12 jobs during his or her lifetime. Also, in March 2023, the Bureau of Labor Statistics reported that only 56% of civilian workers participate in a retirement plan. All of us are searching for the right professional, personal and financial combination. How can I keep a roof over my head, food on the table, do the things I enjoy today, but also sleep comfortably knowing my future – my “retirement” years – will be waiting for me?

For those who find gratifying employment and mental solace, congratulations are in order! For most, it’s a never-ending search. The Dirty Heads have a song called “Vacation.” The lyrics say: “A-a-ay, I’m on vacation. Every single day ’cause I love my occupation. A-a-ay, I’m on vacation. If you don’t like your life, then you should go and change it.”

I agree. If you don’t like where you’re at, do everything in your power to change it, because fantasyland retirement will not mystically appear at age 65. Create a budget. Meet with a financial advisor. Go back to school. Develop a plan. Maintain a long-term view. Yes, this is boring, real-life stuff. But if you stick to the plan, it will bear fruit. By sticking to the long-term plan, short-term gratification opportunities should present themselves.

Recently I was presented with my own short-term “live for today” opportunity. My son is spending his freshman year studying abroad in Florence, Italy, and my wife and I were able to visit. We wore out a big part of the country — Venice, Rome, Pisa, Florence, Cinque Terre. Daily step counts reached 27,000. At one point, breathing heavily and ascending a long, steep gravel hill in Boboli Gardens, my wife said, “Good thing we came here while we’re young. No way I could climb this if I was retired.”

And thus, this Slott Report entry was born. Fantasyland says every septuagenarian energetically bounces around Europe. Reality tells us otherwise. (Run a Google image search for “elderly couple asleep in gondola.”) While we all must deal with everyday obstacles, it is imperative to put your best foot forward. We only get one shot at life. Face reality and create positive change, because “blissful retirement” as it’s portrayed is not promised — nor will it magically appear.

https://irahelp.com/slottreport/what-is-retirement-fantasy-vs-reality/

HOW SECURE 2.0 IMPACTS COMPANY PLAN IN-SERVICE WITHDRAWALS

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

Retirement plan funds are designed for retirement, but Congress continues to make it easier for employees to pull out those funds while still working. The SECURE 2.0 law adds several new in-service withdrawals that can be made from 401(k), 403(b) and 457 plans. The law also  relaxes some of the rules for traditional hardship withdrawals from these plans.

New SECURE 2.0 In-Service Withdrawals

The new in-service withdrawal options are for: federally-declared disaster expenses; terminal illness; victims of domestic abuse; and emergency expenses. (In-service withdrawals to pay long-term care premiums become available in 2026.) Note that plans are not required to offer withdrawals for any of these reasons. But if offered, these new SECURE 2.0 withdrawals can be made before age 59 ½ —without paying the 10% early distribution penalty.

SECURE 2.0 Changes to Traditional Hardship Withdrawals

Traditional hardship withdrawals from 401(k) and 403(b) plans have always been required to satisfy three conditions:

  • The withdrawal must be for an “immediate and heavy financial need.” Most plans allow employees to automatically satisfy this requirement if their expense fits into one of seven “safe harbor” categories: medical expenses; home purchase costs; post-secondary educational expenses; payments necessary to prevent eviction or mortgage foreclosure; funeral expenses; expenses to repair home damage; and disaster-related expenses and loses.
  • The amount of the hardship request can’t more than is necessary to cover the expense.
  • The employee can’t have enough cash or other assets readily available to cover the expense.

457(b) plans are subject to a stricter standard than the 401(k)/403(b) standard: the expense must have resulted from an “unforeseeable emergency.”

Starting in 2023, the SECURE 2.0 law permitted 401(k) and 403(b) plans to allow employees to self-certify that all three of these conditions have been met. 457(b) plans can also allow self-certification to demonstrate an unforeseeable emergency. Although self-certification is optional, not mandatory, most plans will welcome it as a way of taking a big administrative burden off their plate.

SECURE 2.0 also gave 403(b) participants more access to their accounts for hardship withdrawals. Before 2024, 401(k) hardship withdrawals could be made from all plan accounts, but 403(b) withdrawals could only come from employee salary deferrals (without earnings). In addition, 403(b) participants were required to obtain plan loans before receiving a hardship distribution, but 401(k) participants were not. Effective for 2024, SECURE 2.0 makes the 403(b) hardship withdrawal rules the same as the 401(k) rules.

Taxes and Penalties

Keep in mind that in-service withdrawals of pre-tax funds, whether traditional hardship withdrawals or SECURE 2.0 withdrawals, are taxable. And, while SECURE 2.0 withdrawals are never subject to the 10% penalty, traditional hardship withdrawals may be subject to penalty if made before age 59 ½.

https://irahelp.com/slottreport/how-secure-2-0-impacts-company-plan-in-service-withdrawals/

HIGHER EDUCATION AND BACKDOOR ROTH CONVERSIONS: TODAY’S SLOTT REPORT MAILBAG

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

Question:

I have a client who is under age 59 ½ with a small traditional IRA. She wants to cash it in and use the funds for college education for her daughter. If I remember correctly, they can use this without a 10% penalty. Is there a limit on the amount she can take penalty-free to use for college?

Answer:

There is no limit to the amount of funds that can be taken penalty-free to pay for higher education costs. The funds can be used for tuition, room and board and other expenses that are required by the school. Keep in mind that although the 10% penalty would not apply to any pretax funds coming out of the IRA, these distributions would still be taxable.

Question:

I am interested in doing the backdoor Roth strategy. I do not have an IRA, but I do have an old SIMPLE IRA from a previous employer. Does the pro-rata rule apply here?

Thanks,

Marcel

Answer:

Hi Marcel,

Whenever the backdoor Roth IRA conversion strategy is being considered, it is good to think about the possible impact of the pro-rata formula. This formula requires you to consider all of your other traditional IRAs when determining the taxation of the conversion.

For this purpose, SIMPLE IRAs are also included (as are SEP IRAs), so when you apply this formula you must also include your old SIMPLE IRA along with any traditional IRAs you might have. This means that, even if you use the backdoor Roth IRA conversion strategy by making a nondeductible traditional IRA contribution and then converting it — a portion of the conversion will still be taxable. That does not mean that doing a backdoor Roth IRA conversion is a bad strategy, but it does mean that you should expect a tax bill.

https://irahelp.com/slottreport/higher-education-and-backdoor-roth-conversions-todays-slott-report-mailbag/

TAX TIME TIPS FOR IRAS

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

IRAs are an important, but often overlooked, part of your overall tax planning. As the deadline for filing 2023 tax returns approaches, it is a good time to incorporate your IRA plan strategies with your overall tax plan. You are probably now busy gathering the necessary information to file your 2023 federal income tax returns. You will want to be sure that as you do so, you keep some important IRA rules and strategies in mind.

2023 IRA Distributions

If you received a distribution from an IRA in 2023, that distribution may affect your overall tax situation. Generally, distributions from retirement plans that include pre-tax dollars will be included in taxable income in the year taken. IRA distributions can increase ordinary income for the year of the distribution, which can potentially cause the loss of valuable exemptions, credits, tax deductions, and taxation of Social Security.

An early distribution may result in a 10% penalty on top of any income tax already owed for the distribution. Remember that rollovers should be reported on your tax return even though distributions taken in 2023 that are properly rolled over are not included in income for the year.

IRA Contribution Deadline for 2023

It is not too late for you to make a 2023 prior-year traditional or Roth IRA contribution. The deadline for IRA contributions is the tax-filing deadline — not including extensions. This year, for most taxpayers, that deadline is April 15, 2024. Having an extension to file your federal income tax return does not give you more time to make a 2023 IRA contribution.

SEP or SIMPLE IRA contributions work differently. These contributions may be made up to the business’ tax filing deadline — including extensions.

If you qualify, making a deductible traditional IRA contribution for 2023 is a valuable strategy to lower 2023 taxable income. Also, making your first Roth IRA contribution now as 2023 prior-year contribution will have the benefit of starting the five-year period for tax-free distributions of earnings as of January 1, 2023, even though the contribution is not actually made until 2024.  This strategy gives your client the potential to take qualified tax-free distributions of earnings from their Roth IRA in less than five years.

Unwanted or Excess 2023 IRA Contributions

Now is also the time to address unwanted or excess tax-year IRA contributions. You may have made a traditional IRA contribution believing you would be able to deduct it. Or, you made a Roth IRA contribution and discovered your income was too high. These contributions may be removed as an excess without penalty or recharacterized.

While the deadline for these corrective transactions is not until October 15, 2024, your 2023 federal income tax return may be affected. Therefore, doing these transactions now before filing can help avoid having to file an amended return later. Acting now also avoids the potential pitfalls of waiting until the last possible minute to meet this important deadline.

No Prior-Year Conversions

If you are looking at your 2023 tax situation and thinking that it would be beneficial to do a conversion, there is some bad news. There is no such thing as a prior-year conversion. It is too late. A 2023 conversion had to leave the traditional IRA in 2023 and be reported by the custodian on a 2023 Form 1099-R.

QCDs for 2023

It is also too late to do a 2023 qualified charitable distribution (QCD).  You cannot take a distribution in 2024 and have it count as a 2023 QCD.

If you did do a QCD in 2023, be aware that you will not be getting any specific reporting from the custodian showing this. You will only receive a 2023 Form 1099-R showing a distribution, but you will need to properly report the QCD on your 2023 tax return. Be sure that your tax preparer is aware that a QCD was done in 2023 so you can cash in on this valuable tax break.

https://irahelp.com/slottreport/tax-time-tips-for-iras/

WHAT’S THE PROCESS WHEN A TRUST (OR ESTATE) IS IRA BENEFICIARY?

The same conversation has, understandably, been repeated many times. The questions are similar: “What do we do when a trust (or estate) is IRA beneficiary? How do we set up the account? Aren’t we now stuck with the high trust tax rates?” Of course, there is not enough space here to get deep into the weeds, but there are some foundational considerations to cover when it comes to this confusing topic.

Account Ownership. When a trust or estate is named as IRA beneficiary, then the trust or estate is the beneficiary. The beneficiary is NOT the trust beneficiaries or the beneficiaries of the estate. We do not get to automatically disregard the trust or estate and set up an inherited IRA for any of those people (assuming they are people). In fact, we must set up a trust-owned or estate-owned inherited IRA. The trust or estate oversees the account – or more specifically, the trust trustee or the executor of the estate is in charge. For a trust-owned inherited IRA, the titling of the account might be something like: “William Smith, IRA (deceased June 1, 2021) F/B/O Adam Johnson, Trustee of The Smith Family Trust, beneficiary.

Payout Rules. An estate is a non-designated beneficiary, or what I like to call a “non-person” beneficiary. When a non-person inherits an IRA, there are only two possible payout structures (not counting a lump sum distribution): the 5-year rule or the “ghost” rule. Which payout rule applies depends on when the original IRA owner died in relation to his required beginning date (RBD). The RBD is April 1 of the year after the year a person turns 73 (or whatever RMD age was in effect at the time, e.g., 70 ½ or 72). When death is before the RBD, we get the 5-year rule. There are no required minimum distributions (RMDs) during the 5 years. The account must simply be emptied by the end of the fifth year after the year of death.

When death is on or after the RBD, we use the ghost rule. Annual RMDs apply to the estate-owned inherited IRA based on the deceased IRA owner’s remaining single life expectancy, had he survived. Use the decedent’s age in the year OF death to find the initial factor. Then subtract one from this factor for each successive year.

If a trust is named as IRA beneficiary, and if that trust passes the “look-through” or “see-through” rules, we can avoid the 5-year/ghost payouts. With a see-through trust, we can “look through” the trust to the trust beneficiary and use that person’s status to determine the payout applicable to the trust-owned inherited IRA. For example, if the trust beneficiary would be subject to the 10-year rule, then we use that. If the trust beneficiary qualifies as an eligible designated beneficiary (for example, because she is disabled), then we can apply that person’s age for full lifetime RMD stretch payouts from the trust-owned inherited IRA.

Taxes. It is often assumed that with a trust or estate as IRA beneficiary, high tax rates will automatically apply. For comparison purposes, trusts hit the 37% bracket in 2024 when ordinary income exceeds $15,200. A married couple, filing joint, doesn’t hit the 37% bracket until income exceeds $731,200. But the high trust tax rates only apply when payouts from the trust-owned inherited IRA remain in the trust account. Such is not always the case. Oftentimes, dollars paid out of a trust-owned (or estate-owned) inherited IRA will flow through the trust or estate and be distributed to the trust or estate beneficiary. This allows the taxes due to be shifted to these beneficiaries at whatever their personal tax bracket may be.

When a trust or estate is the beneficiary of an IRA, there are special rules that must be followed. Things can get complicated quickly. Before haphazardly opening new inherited accounts and bouncing IRA money around, it is important to understand some basic concepts – like ownership structure, applicable payout rules and taxes.

https://irahelp.com/slottreport/whats-the-process-when-a-trust-or-estate-is-ira-beneficiary/

COVERDELL ESA ACCOUNTS AND FIRST RMD YEAR DISTRIBUTIONS: TODAY’S SLOTT REPORT MAILBAG

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

Question:

Hi Ed,

I have Coverdell ESA accounts for my 5 grandchildren. My question is whether Coverdell ESAs can be treated the same as 529 plans under the new law when it comes to unused funds being eligible for rollover to a Roth IRA.

Answer:

The SECURE 2.0 provision allowing Roth IRA rollovers of unused 529 funds does not cover Coverdell ESA accounts. However, you can do a 60-day rollover or direct transfer of the Coverdell accounts to 529 plans and then roll over any unused funds to a Roth IRA (assuming you meet the requirements for a 529-to-Roth IRA rollover).

Question:

I need your help!  We have a unique situation with a client, Paul, born December 31, 1951. He will be age 73 on December 31, 2024. If Paul takes a distribution from his IRA in October, will that be considered his RMD since he isn’t RMD age until December 31?

Paul’s RMD is almost $50,000 and he would rather not double that up in 2025. So, we want to be sure that any IRA distribution he takes any time during 2024 will qualify as his RMD.

I thought, under the old rules, that an IRA distribution at age 70 did not qualify as an RMD in the year the client turned age 70 ½.  For example, if I turned age 70 in February I would be age 70 ½ in August. If I took a distribution from my IRA in May, did that satisfy my age 70 ½ RMD?

Kathy

Answer:

Hi Kathy,

Any distribution taken in the year someone reaches his first RMD year counts as an RMD for that year. So, if Paul takes a distribution in October 2024 (or anytime in 2024), that will count as a 2024 RMD. The same rule applied under the old rules when the first RMD year was the year someone reached age 70 ½. So, in your example, if you turned age 70 ½ in August of a particular year, a distribution taken in May of that year would count as an RMD for that first RMD year.

https://irahelp.com/slottreport/coverdell-esa-accounts-and-first-rmd-year-distributions-todays-slott-report-mailbag/

WHAT ARE THE RULES FOR 401(K) IN-SERVICE WITHDRAWALS?

Congress has determined that 401(k) and other company plan funds, with certain exceptions, should be saved for retirement. For that reason, it has imposed strict restrictions on the ability of employees to withdraw from these plans while still working.

Plans must follow these rules, or they risk losing their tax-qualified status. But plans are free to impose even stricter rules than required by the tax code. So, check your plan written summary or ask your plan administrator or HR rep for the particular withdrawal rules that apply to your plan.

Restrictions on Withdrawals:

Each 401(k) account has its own restriction rules:

Pre-tax and Roth Employee Contributions

Generally, 401(k) plans can’t allow in-service distributions from pre-tax and Roth employee contribution accounts before age 59 ½. But withdrawals from these accounts are available, if the plan allows, in case of financial hardship, disability or birth or adoption, and for active reservists. Plans also may allow SECURE 2.0 withdrawals (discussed below).

After-tax Contributions

Plans that offer non-Roth after-tax contributions can allow those contributions and their earnings to be withdrawn at any time, even before age 59 ½. This would be helpful if employees are able to use the “Mega Backdoor Roth” strategy to convert after-tax contributions to Roth IRAs.

Emergency Savings Contributions

Employers can offer lower-paid workers a special account within a 401(k) plan for emergency savings contributions made on a Roth basis. Withdrawals from these accounts are available at least monthly.

Employer Contributions

Most plans that allow in-service withdrawals from employer contribution (matching or nonelective/across-the-board) accounts follow the same rules that apply to pre-tax and Roth employee contribution accounts. This simplifies plan administration. But plans can be more liberal and allow withdrawals at a specified age (even earlier than 59 ½), after at least five years of plan participation or after the contribution has been in the plan for at least two years.

Rollover Contributions

Some 401(k) plans allow employees to roll over pre-tax retirement accounts, including IRAs, into the plan. Plans can allow in-service withdrawals from rollover contribution accounts at any time, regardless of age or service. But this is not mandatory and here again, many plans apply the same rules that apply to pre-tax and Roth employee contribution accounts.

SECURE 2.0 Withdrawals

The SECURE 2.0 law adds several new in-service withdrawals that can be made from any 401(k) account. These are withdrawals for: federally-declared disaster expenses, terminal illness, victims of domestic abuse, and emergency expenses. (In-service withdrawals to pay for long-term care premiums become available in 2026.) These withdrawals can be taken at any age, but withdrawals for terminal illness are only available if the employee is otherwise eligible for a withdrawal (for example, because of financial hardship). Note that plans are not required to offer any of these SECURE 2.0 withdrawals.

Taxation

In-service withdrawals of pre-tax 401(k) funds are taxable and, if made before 59 ½, may be subject to penalty. A Roth 401(k) withdrawal that is a “qualified distribution” comes out completely tax-free. If not qualified, the earnings part of a Roth withdrawal is taxable under a pro-rata rule. The earnings portion of each withdrawal of non-Roth after-tax contributions is always taxable on a pro-rata basis.

https://irahelp.com/slottreport/what-are-the-rules-for-401k-in-service-withdrawals/

TAX COURT RULES NEW SECURE 2.0 STATUTE OF LIMITATIONS ON EXCESS CONTRIBUTION PENALTY IS NOT RETROACTIVE

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

The Tax Court recently ruled that the new SECURE 2.0 statute of limitations (SOL) on the 6% excess IRA contribution penalty is not retroactive.
SECURE 2.0 Changes

SECURE 2.0 established a six-year SOL on the 6% excess IRA contribution penalty and a three-year SOL on penalties for missed required minimum distributions (RMDs).

Prior to SECURE 2.0, the SOL for both these penalties was not considered to start to run until Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, was filed. If Form 5329 was not filed, the IRS could have potentially assessed penalties at any time, even years into the future, and gone all the way back to the first year when any excess contribution or missed RMD was made.

In SECURE 2.0, Congress said the new SOL for both penalties was “effective upon enactment.” The “enactment” date of SECURE 2.0 was December 29, 2022. But the new law was not clear on whether the new SOL applied only for years on or after 2022 or also applied retroactively for years prior to 2022. The IRS has not issued any guidance on this.
New SOL Is NOT Retroactive

In Couturier v. Commissioner, No. 19714-16; 162 T.C. No. 4, (February 28, 2024) the Tax Court ruled that the SOL for the excess contribution penalty should NOT be applied retroactively. The case arose from a last-ditch appeal by Clair Couturier who had previously been found to have owed $8.4 million in excess contribution penalties after he attempted to roll over $26 million in plan funds he received in a buyout package.

This case did not involve the new three-year SOL for the missed RMD penalty. However, the effective date for that provision is the same as the effective date for the new SOL for the excess contribution penalty. So, it seems reasonable to assume the Tax Court would interpret the missed RMD penalty to work the same way – that is, it also is not retroactive.
Stay Tuned

This case has already been appealed multiple times, so it is possible that this is not the final word here. In the meantime, anyone thinking that they can let sleeping dogs lie, and not fix excess IRA contributions or missed RMDs from years prior to 2022, may want to reconsider. This Tax Court case is a warning that the new SECURE 2.0 SOL may not be enough to make those problems go away. Stay tuned to the Slott Report for any future updates!

https://irahelp.com/slottreport/path-slottreport-tax-court-rules-new-secure-20-statute-limitations-excess-contribution-penalty-not/

ROTH CONVERSIONS AND QUALIFIED CHARITABLE DISTRIBUTIONS: TODAY’S SLOTT REPORT MAILBAG

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

QUESTION:

How many times in one year can a person do a Roth conversion?

Thank you.

ANSWER:

A person can do an unlimited number of Roth conversions in a year. Roth conversions do not count against the one-rollover-per-year rule, so there is no concern there. Each conversion in a calendar year will have the same start date for the 5-year conversion clock –- January 1 of that year. So essentially, multiple conversions in a single year will be combined and considered one big conversion for 5-year-conversion-clock reporting.

QUESTION:

Can a QCD (qualified charitable distribution) be made from a 401(k) or defined benefit plan?

Thanks.

ANSWER:

QCDs can only be made from IRAs (and inactive SEP and SIMPLE IRAs). A QCD cannot be done from any employer plans. However, employer plan dollars –- like from a 401(k) –- could potentially be rolled over to an IRA, and then the QCD could be completed. A few more important QCD items to consider: the IRA owner must be at least age 70½ to do a QCD; the QCD cap for 2024 is $105,000; the donation must be directly transferred from the IRA to the charity (although a check made payable to the charity can be sent to the IRA owner for hand delivery to the charity); and nothing can be received in return for the donation.

https://irahelp.com/slottreport/path-slottreport-roth-conversions-and-qualified-charitable-distributions-todays-slott-report-mailbag-0/

5 COMMON IRA MISTAKES AND PROPER CORRECTIVE ACTION…IF AVAILABLE!

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

 

Year after year, many of the same IRA errors happen again and again. Based on the volume of times these mistakes occur, it seems appropriate to create a short list of repeat offenders…and offer some advice on how to properly move forward. In no particular order, here is a handful of common IRA mistakes, along with the proper corrective measures.

 

1. Rolled over a required minimum distribution (RMD). Oops. RMDs cannot be rolled over. Technically, an RMD is not an ERD – an “eligible rollover distribution.” If an RMD is rolled over, it is an excess contribution, and the excess contribution rules must be followed. You have until October 15 of the year after the year of the excess contribution to make the correction with no penalty. Prior to the deadline, the rolled-over RMD must be withdrawn along with the attributable earnings. No special tax forms are required, and there is no penalty. Any earnings are taxable. After the October 15 deadline, only the excess must be withdrawn – the earnings can remain. (I know – weird.) File IRS Form 5329 and pay the 6% annual excess contribution penalty.

 

2. Contributed to a Roth IRA for a child with no earned income. Your child must have earned income to be eligible for a traditional or Roth IRA contribution. If a contribution is made to an IRA for anyone with no earned income, it is an excess contribution, and the same excess contribution correction protocols outlined above must be followed.

 

3. Took two IRA distributions with the intent to roll them both over. Uh-oh. The one-rollover-per-year rule does not allow two separate IRA distributions to be rolled over within a 12-month period. Combining them into a single deposit won’t work. Is there a fix? If you are still within the 60-day period, one of the distributions can be rolled over. Usually, a person will choose to put back the larger of the two withdrawals. Since the other distribution cannot be rolled over, and since you will be stuck with the taxes anyway…might as well put it into a Roth IRA (assuming you are still within the 60 days). This qualifies as a valid Roth conversion, and conversions do not count against the one-rollover-per-year rule.

 

4. Non-spouse beneficiary tried to do a 60-day rollover with inherited IRA dollars. Oh, no. There is no fix for this scenario. This is what we refer to as a “fatal error.” Non-spouse IRA beneficiaries cannot do 60-day rollovers with inherited IRA dollars. If you take a distribution from an inherited IRA as a non-spouse beneficiary, taxes will be due. Those dollars cannot be rolled over, converted, or redeposited back into the same inherited IRA.

 

5. Taxes withheld on Roth conversion when under 59 ½. This is a sneaky mistake. Taxes withheld on a Roth conversion do not get converted. If you are under 59 ½, this is a problem. The taxes withheld are, in fact, a premature withdrawal, and a 10% penalty will be due on the money sent to the IRS! However, if caught in time, there is a fix. If still within 60 days, the amount withheld can be replaced with money from another account. Use other dollars to “make up” the withholding. Put these “make-up” dollars into the Roth, and the conversion will be made whole. Now, the taxes originally withheld will be a credit at the IRS.

 

Potholes and speedbumps abound with IRAs. Drive carefully. But know that if you do bump a curb, there is a good chance proper corrective action is available.

https://irahelp.com/slottreport/path-slottreport-5-common-ira-mistakes-and-proper-corrective-actionif-available/

A WAY TO JUMP-START 529-TO-ROTH ROLLOVERS

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

We have covered in The Slott Report the new SECURE 2.0 provision that allows unused 529 plan funds to be rolled over to Roth IRAs. It originally appeared that this new rule was to be effective for 2024. However, the IRS has now said that rollovers done before April 15, 2024 can count as Roth IRA contributions for tax year 2023 if the 529 beneficiary has not already maxed out on his 2023 IRA contribution limit.

As background, the new SECURE 2.0 provision contains a number of restrictions. The total rollover amount cannot exceed a lifetime maximum of $35,000, and that limit is not indexed for inflation. The Roth IRA must be in the name of the 529 beneficiary – not the 529 owner. The 529 plan must have been open for more than 15 years, and rollover amounts cannot include any 529 contributions (and earnings) made in the preceding five-year period.

529-to-Roth IRA rollovers are considered Roth IRA contributions, so they count towards the annual IRA contribution limit. This means that a full $35,000 529-to-Roth IRA rollover would take several years to complete. Any other IRA contributions (traditional or Roth) made for the same year would reduce the amount of the 529-to-Roth IRA rollover available.

But can a beneficiary who has not already maxed out on the 2023 IRA contribution limit for 2023 do a 529-to-Roth IRA rollover by April 15, 2024? In other words, can a 529-to-Roth rollover done before April 15, 2024 count as a 2023 contribution?

SECURE 2.0 is not clear on this, but the law does say that the new rule is effective for 529 distributions made after December 31, 2023. It does not say that it is effective for tax years beginning after December 31, 2023. Based on this language, the IRS added the following to its 2023 1099-R instructions:

“A [529] distribution made after December 31, 2023, and before April 15, 2024, that is rolled over to a Roth IRA by April 15, 2024, and designated for 2023 would be reported as a Roth IRA contribution for 2023.”

So, a 529 distribution made in 2024 and rolled over before April 15, 2024 can count as a tax year 2023 IRA contribution. This means that if you are a 529 beneficiary and you haven’t already made IRA contributions for 2023 up to the $6,500 limit, you still have time to do a 529-to-Roth rollover in an amount equal to the unused part of the $6,500 limit. Just make sure the custodian knows to report this as a 2023 contribution. Better yet, if you do a rollover before April 15 that counts as a 2023 contribution, you can also do a second rollover in 2024 that counts as a 2024 IRA contribution.

https://www.irahelp.com/slottreport/way-jump-start-529-roth-rollovers

BACK-DOOR ROTH IRAS AND ROTH 401KS: TODAY’S SLOTT REPORT MAILBAG

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

Question:

Hi

Can we contribute backdoor Roth IRA money to my husband’s Roth IRA since I have existing traditional IRA accounts, but my husband has none? Thank you very much for answering my questions.

Pinan

Answer:

Hi Pinan,

Many high-income individuals use back-door Roth IRA conversions to fund Roth IRAs when their income is too high to contribute directly to a Roth IRA. There are no income limits on conversions, so what these individuals do is make nondeductible traditional IRA contributions and then convert these funds to a Roth IRA.

To use the back door Roth IRA conversion strategy, you must have earned income, and you are limited to the IRA contribution limit for the year. For 2024, the contribution limit for IRAs is $7,000 ($8,000 if you are age 50 or over).

When the funds are converted, a pro rata formula applies. So, if you have other taxable traditional IRA funds, then a portion of your conversion will be taxable even though the contribution was nondeductible. If your husband has no other IRA funds (including SEP and SIMPLE plans), then the pro rata formula would not apply when he does a back door Roth conversion. However, it would apply to you if you were to do a backdoor Roth. Each individual is looked at separately when applying this formula. One spouse’s pre-tax vs. non-deductible (after-tax) IRA dollars has no impact on the other spouse.

Question:

What if I put a small Roth distribution from a former employer plan into a traditional IRA at a bank that I had opened with a rollover from a previous employer. Is there a problem with that? If so, what should I do about it? It has only been a few months.

Sincerely

Candy

Answer:

Hi Candy,

This is a problem because Roth 401(k) funds are not eligible to be rolled over to a Traditional IRA. You have an excess contribution in your Traditional IRA. If you do not fix this, you will be subject to a 6% penalty on the ineligible dollars.

You can fix the excess and avoid the penalty by removing it, plus net income attributable, by October 15 of the year following the year of the contribution (or in your case, the erroneous rollover). Your other potential fix with the same deadline would be recharacterizing these funds to a Roth IRA. You will need to be sure that the custodian properly reports the transaction either as a correction of an excess contribution or recharacterization because special coding is required.

https://www.irahelp.com/slottreport/back-door-roth-iras-and-roth-401ks-todays-slott-report-mailbag

MAKING A 2023 IRA CONTRIBUTION? HERE ARE 4 RULES THAT MAY SURPRISE YOU

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

The tax season is upon us. This is the time when many individuals fund their IRAs by contributing for the prior year. Contributing to an IRA may seem pretty straightforward, and in many ways it is! But there can be twists. Here are four rules that may surprise you when you make your 2023 IRA contribution.

1. File first and fund later. Frequently, during tax season we are asked if an IRA contribution must be made before the tax return is filed. The answer is no. This is not required. You can claim a deduction for your 2023 IRA contribution now when you file your taxes and fund it later. Some people even fund their IRA contribution with their tax refund if the timing is right. Just don’t wait too long. If you claim the contribution, be sure you get it done before the deadline (see #4 below).

2. Spousal contributions can help. Not working outside the home doesn’t necessarily count you out when it comes to saving for retirement by making a 2023 IRA contribution. If your spouse has taxable compensation for the year, you can make a spousal contribution to your IRA based on your spouse’s taxable compensation. Yes, you can still build your retirement savings as a stay-at-home spouse.

3. No age limits for IRA contributions. Think you are too old to contribute to an IRA? It’s time to reconsider. The rules have changed. It used to be that contributions were not permitted to a traditional IRA once you reached the year you turned age 70 ½, but the SECURE Act did away with this restriction.  There have never been age limits for Roth IRA contributions. The bottom line is that you can be any age and make a 2023 contribution to either a traditional IRA or Roth IRA. This could be helpful for those who work part time in retirement and do not need the income.

4. No extensions for IRA contributions. You may be able to get more time to file your taxes but that will not help you with your IRA contribution. The deadline for making your 2023 traditional or Roth IRA contribution is April 15, 2024. This is true even if you have an extension of time to file your taxes.

https://www.irahelp.com/slottreport/making-2023-ira-contribution-here-are-4-rules-may-surprise-you

LAST WEEK IN LA JOLLA

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

Last week in La Jolla, California, the Ed Slott team hosted another incredibly successful 2-day advisor training program. Nearly 200 financial professionals from across the country chose to join us for some intense IRA and retirement plan education. Topics included all things Roth, net unrealized appreciation, naming trusts as IRA beneficiaries, new SECURE 2.0 updates, QCDs, 10% penalty exception rules, creditor/bankruptcy protection rules, and the list goes on.

Between each session, participants were welcome to approach the Ed Slott team and ask any questions they might have. As expected, inquiries continued at breakfast, at lunch, in the lobby…and even into the bathroom. It’s great! This is complicated material. As presenters and hosts, we fully expect to get bombarded with questions. It is our pleasure to discuss targeted issues, ask probing questions, make recommendations, and send people down the proper path with a smile and a handshake. If it weren’t for the positive energy of each and every participant, seminars like this would not be nearly as enjoyable. Interestingly, some inquiries repeated themselves. Here is a handful of some of the more popular questions:

Do inherited Roth IRA beneficiaries have to take annual RMDs (required minimum distributions) or not? The answer is: it depends. If the Roth IRA beneficiary qualifies as an eligible designated beneficiary (EDB), then he has a choice. He can choose to take lifetime “stretch” RMDs based on his own single life expectancy, OR he can choose the 10-year payout rule. If he chooses the latter, there will be no annual RMDs in years 1 – 9 of the 10-year period, but the account will need to be emptied by the end of year ten.

When a trust or estate is the beneficiary of an IRA, do we include all the names of the trust (or estate) beneficiaries in the account title? No, that is not necessary. Only the name of the trust or estate must be included. For example: “Fred Johnson, IRA (deceased June 1, 2021) F/B/O Adam Hill, Trustee of The Johnson Family Trust, beneficiary.”

What if a person turned 73 this year, but died before taking her RMD? Does her IRA beneficiary still have to take the year-of-death RMD? In fact, there is no RMD to take. Since this person just turned 73 in 2024, but then passed away, she never made it to her required beginning date (RBD), which was April 1, 2025. Since she did not make it to the RBD, then RMDs were never “turned on.” A person takes her first RMD in anticipation of making it to the RBD. But if that person dies prior to the RBD, then there is no year-of-death RMD to take.

What’s the deal with the pro-rata rule? We welcome these questions with a smile because this topic is universally confounding. The pro-rata conversation requires an example, so here is a link to a previous Slott Report pro-rata rule article:

https://www.irahelp.com/slottreport/pro-rata-rule-explained-%E2%80%93-you-are-not-getting-double-taxed

Additional popular questions pertained to the tax reporting of Roth retirement plan matching contributions, RMD aggregation rules, and when IRA payouts to a trust beneficiary can be impacted by the high trust tax rates. It was our pleasure to answer every inquiry to the best of our ability. We look forward to the next Ed Slott 2-day event July 18-19 in National Harbor, Maryland (near Washington, D.C.).

Interested in joining us for our next 2-Day Instant IRA Success Workshop? Find out more information and register here: https://www.irahelp.com/2-day/ira-workshop-2024-07

https://www.irahelp.com/slottreport/last-week-la-jolla

THE PRO-RATA RULE AND INHERITED IRA RMDS: TODAY’S SLOTT REPORT MAILBAG

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

Question:

I was given your information by a financial advisor who follows your articles. I have a unique situation with a client who is a high earner with several old 401(k) accounts. My idea was to have her fund an IRA with a contribution for 2023 and 2024. Then I was going to have her do the Roth conversion with no tax liability. She currently has no IRAs. My question is: If I roll over her 401(k)s later in 2024, would she still be subject to the pro-rata rule? When I contacted my back office, they said that at the time of conversion she will not have an IRA, so she should be all set. However, my thought is that the pro-rata rule applies on a calendar year basis, so she would be subject to the pro-rata IRA rule.

Sincerely,

Matt

Answer:

Hi Matt,

You are correct. The pro-rata rule is applied by looking at the value of all traditional IRAs, including SEP and SIMPLE IRAs (but not inherited IRAs), as of the end of the year that a Roth conversion (or other IRA distribution) takes place. So, to avoid the pro-rata rule, have your client wait until next year to do the 401(k) rollovers.

Question:

I inherited both a traditional and a Roth IRA from my unmarried partner, who passed away in 2021. He had started taking RMDs. I am less than 10 years younger than him. My question is whether I have to empty both accounts within 10 years of his death? No one is giving me an answer one way or another. I did take a distribution from the traditional IRA on the advice of the custodian.

Thanks for any help!

Answer:

Since you aren’t more than 10 years younger than your partner, you qualify as an “eligible designated beneficiary.” As an EDB, you can stretch required minimum distributions (RMDs) from the traditional inherited IRA over your lifetime. You are not subject to the 10-year payout rule on this account. You should have already taken RMDs from the inherited traditional IRA for both 2022 and 2023. Regarding the inherited Roth IRA, as an EDB you have a choice. You can elect lifetime stretch RMDs just like you are doing on the traditional IRA, or you can elect the 10-year rule with no annual RMDs. This is a popular election by EDBs for inherited Roth IRAs as it allows the account to sit untouched and grow tax-free for a decade.

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

MORE 401(K) SECURE 2.0 CHANGES ALREADY IN EFFECT – AND ON THE WAY

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

By now, you probably know that a number of SECURE 2.0 provisions pertaining to 401(k) (and other company savings plans) became effective this year. We’ve already discussed two of them in The Slott Report. The first is that Roth 401(k) accounts, like Roth IRAs, are now exempt from RMDs. The second is that plans are allowed to permit employees to have employer contributions made to a Roth account. (Another SECURE 2.0 change requires higher-paid age-50-or-older plan participants who want to make catch-up contributions to make them as Roth contributions. That change was originally supposed to take effect this year, but the IRS delayed it until 2026.)

Here are two other 401(k) SECURE 2.0 changes effective now:

  • Matches on Student Debt. 401(k) (and 403(b), 457(b) and SIMPLE IRA) plans are allowed to make matching plan contributions on student loan repayments made by employees. This is optional, not mandatory. A match can be made on debt incurred by an employee for the employee’s own education or for the education of a spouse or dependent. In addition, employees must certify their loan repayments at least annually. Although there has been interest among employers in adding this new match, most have been reluctant to do so because the IRS hasn’t yet provided any guidance on a number of unanswered questions.
  • Emergency Savings Accounts. Another new optional feature for employers is to offer lower-paid workers a special sub-account within a 401(k) (or a 403(b) or 457(b)) 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. A recent study shows that about 25% of employers are interested in adding this feature to their plans. Within the past several weeks, both the IRS and DOL have issued helpful guidance on these new accounts.

Two other 401(k) SECURE 2.0 changes don’t kick in until 2025:

  • Automatic Enrollment. Most newly-established 401(k) (and 403(b)) plans will be required to automatically enroll employees in the plan – unless the employee chooses to opt out. This provision doesn’t apply to plans established before December 29, 2022 – the date SECURE 2.0 was enacted – or to small businesses with 10 or fewer employees, new businesses (those that have been in business for less than three years), and church-sponsored or governmental plans.
  • Higher Catch-Ups. Employees aged 60, 61, 62 or 63 will be allowed to make catch-up contributions to a 401(k) (or to a 403(b) or 457(b)) in excess of the regular catch-up limit. The age 60-63 catch-up limit for 2025 will be $11,250 (150% of the regular limit for 2024). Higher catch-ups will also be available for SIMPLE IRA participants.

https://www.irahelp.com/slottreport/more-401k-secure-20-changes-already-effect-%E2%80%93-and-way

THINKING ABOUT A 2023 SEP IRA CONTRIBUTION? HERE ARE 6 RULES YOU NEED TO KNOW

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

Are you thinking about making a Simplified Employee Pension (SEP) IRA plan contribution for 2023? If so, here are 6 rules you need to know.

1. Only a business can make a SEP contribution. If you are employed by someone else, you cannot make a SEP contribution using your employment earnings. Only a business or employer can make a SEP contribution. If you are a small business owner, or even a sole proprietor, you can qualify. These plans are a popular choice for small businesses because they are inexpensive and easier to administer than other retirement plans.

2. Contributions, which are tax-deductible for the business or individual, go into a traditional IRA established by the employee. One of the key advantages of a SEP IRA over a traditional or Roth IRA is the elevated contribution limit. For 2023, business owners can contribute up to 25% of up to $330,000 of compensation, limited to a maximum annual contribution of or $66,000.

3. Once in the IRA, the funds are like any other IRA funds and are subject to all the rules that normally apply to IRAs. The funds immediately belong to the employee, and the employee can do whatever they want with them, including taking a distribution. It is not unheard of for employees to immediately take distributions as soon as the SEP contributions are made. This may not be a smart move as far as saving for retirement, but it is allowed. Distributions are taxable and will be subject to the 10% early distribution penalty if taken before age 59 ½, unless an exception applies.

4. If you make a SEP IRA contribution for 2023, you can still contribute to either a Roth IRA or a traditional IRA, as long as you are eligible. However, because you would be considered an active participant in an employer plan, it may prevent you from taking a tax deduction for an IRA contribution.

5. Your deadline for making 2023 contributions to a SEP is not the same as your IRA contribution deadline. For IRAs, the deadline is generally the tax-filing deadline, not including extensions. For SEP contributions, if you have an extension to file your business’ tax return, the SEP contribution deadline is your deadline, plus extensions.

6. Generally, salary deferrals are not allowed to be made under the SEP IRA plan. If you are doing this, you usually have a problem. However, there is a type of SEP called a Salary Reduction SEP Agreement (SAR-SEP). New SAR-SEPs were not allowed to be established after 1996, but those already in existence were permitted to continue. If this rare exception applies to you, you can continue to make salary deferrals to your SAR-SEP IRA.

https://www.irahelp.com/slottreport/thinking-about-2023-sep-ira-contribution-here-are-6-rules-you-need-know

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

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

QUESTION:

If an individual has both an IRA and a 401(k) and wants to convert the IRA to a Roth IRA, does he have to take both the IRA and the 401(k) RMD (required minimum distribution) before doing a Roth conversion?

Thanks for your kind attention.

ANSWER:

For things like Roth conversions, the pro-rata rule and RMD aggregation rules, IRAs and 401(k) plans are completely independent of each other. Yes, you do need to take your IRA RMD prior to doing a Roth conversion of any portion of the remaining IRA dollars. However, your 401(k) has no impact on this transaction. If you wish, you can wait and take your 401(k) RMD later in the year, after the Roth IRA conversion.

QUESTION:

Hello,

I hope you can help out with my question. What is the proper way to rename an Inherited IRA or Roth IRA, and is there a timeframe in which this must be done?  And in the case that the original beneficiary passes away before the account is emptied, under the 10-year rule, does the Successor Beneficiary have to once again rename the IRA or Roth IRA.?  If so, what is the proper way and timeframe to do that?

I look forward to your reply.

Regards,

Janice

ANSWER:

Janice,

When it comes to titling an inherited IRA, the deceased IRA owner’s name must remain on the inherited IRA account title and the account title must indicate that it is an inherited IRA by using the word “beneficiary” or “beneficiary IRA” or “inherited IRA.” There is no universal format – it just must be clear that it is an inherited IRA. For example: “John Smith IRA (deceased 11/27/22) F/B/O John Smith, Jr., Beneficiary.”

If the first beneficiary – John Smith, Jr. – were to pass away before the end of the 10-year rule, the successor beneficiary would have to retitle the account in a similar fashion, such as: “John Smith, Jr. Beneficiary IRA (deceased 1/10/24) F/B/O Sally Smith, Successor Beneficiary.” There is no official deadline for retitling an account as an inherited IRA. However, for many beneficiaries, December 31 of the year after the year of death may be the deadline for taking the first RMD. To process this correctly, setting up a properly titled inherited IRA by this date is necessary. Also, if there are multiple beneficiaries, having retitled inherited IRAs established by the December 31 date ensures that the separate accounting requirements are met. This allows each beneficiary to use the longest possible payout period under the RMD rules.

https://www.irahelp.com/slottreport/roth-conversions-and-inherited-iras-todays-slott-report-mailbag-1

GHOST VS. 5-YEAR: THE CALENDAR DICTATES

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

Ever since the SECURE Act created a 10-year payout rule for most IRA beneficiaries, that topic has garnered the bulk of conversation. This is understandable. Not only was the 10-year rule a brand-new payout structure, but questions swirling around application of the 10-year window remain unsettled. The IRS continues to kick the can down the road when it comes to determining if required minimum distributions (RMDs) apply within the 10-year period for certain beneficiaries. Notices 2022-53 and 2023-54 waived the penalty for “missed” RMDs within the 10-year period for 2021, 2022 and 2023.

Despite the upheaval of the IRA beneficiary payout rules, regardless of the introduction of “eligible designated beneficiaries” as a new class of heirs, and subsequent to the original SECURE Act/SECURE 2.0/IRS Notices/proposed regulations…one thing has remained unchanged: the payout rules applicable when a non-designated beneficiary (what I like to call a “non-person” beneficiary – like an estate) inherits an account. As has been the case for many years, there are only two possible outcomes: the “ghost rule” or the 5-year rule.

Whether the ghost or the 5-year rule applies depends upon when a person dies in relation to his required beginning date (RBD), which is when RMDs are officially “turned on.” The RBD is April 1 of the year after the year a person turns 73. (Prior to the RMD age being raised to 73, the RBD was April 1 of the year after a person turned 70 ½ or 72, depending on what RMD age was in effect at the time.) The RBD is a definitive date on the calendar, and we all have one. You can either die before that date, or you can die on or after that date. And if you have a non-person (like an estate) as your IRA beneficiary, WHEN you die in relation to the RBD matters.

BEFORE: If a person dies BEFORE the RBD with a non-person beneficiary (we’ll assume it’s the estate in this article), the 5-year rule applies. This is the only time the 5-year IRA beneficiary payout rule presents itself. Year One starts in the year after the year of death. There are no annual RMDs within the 5-year period. The only stipulation is that the estate-owned inherited IRA account must be emptied by the end of the fifth year. Interestingly, any 5-year payout schedules started in 2016 – 2019 became 6-year schedules. How? The CARES Act RMD waiver in 2020 also eliminated 2020 from any 5-year calculation, so anyone in this category essentially has a 6-year rule. Also, be aware that all Roth IRA owners, no matter how old they might be, are always deemed to die before the RBD, because Roth IRAs do not have lifetime RMDs.

ON or AFTER: If a person dies ON or AFTER the RBD with a non-person beneficiary, we have the ghost rule. The estate-owned inherited IRA will have annual RMDs based on the deceased IRA owner’s remaining single life expectancy, had he survived. One quirk to remember – we use the IRA owner’s age in the year OF death to calculate the first RMD factor, and then minus one for each year thereafter. This is different than the standard stretch IRA RMD calculation where we use the beneficiary’s age in the year AFTER the year of death.

Ghost Rule Example: Roger dies at age 87 and leaves his IRA to his estate (a non-person beneficiary). RMDs from this estate-owned inherited IRA are predicated on Roger’s remaining single life expectancy factor, minus one each year. The first RMD in the year following the year of death is based on Roger’s 6.1-year remaining single life expectancy factor (7.1 for an 87-year-old in the year OF death, minus one).

Ghost vs. the 5-year rule. The calendar dictates which will apply.

https://www.irahelp.com/slottreport/ghost-vs-5-year-calendar-dictates

Weekly Market Commentary

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

We’re getting lots of questions about the SECURE 2.0 change that allows annuitized IRA annuities to be aggregated with non-annuity IRA funds for required minimum distribution (RMD) purposes. This change could drastically reduce RMDs. But, without a proper valuation of the annuity from the insurance company, it will be difficult to take advantage of it.

When an annuity within an IRA is annuitized, RMDs are calculated differently than they are for other IRA funds. For the other (non-annuitized) funds, RMDs are calculated under the usual rule (prior-year 12/31 account balance divided by the owner’s life expectancy factor). But for the annuitized part, the annuity payments received during a year are considered the RMD for that year.

This amount of total payments is typically much larger than the RMD that would be required if the annuitized part was determined under the usual RMD method. However, before SECURE 2.0, this overage couldn’t be credited against the RMD for the other IRA funds. In other words, there were two separate RMDs – one for the annuitized portion and one for the remaining funds – that couldn’t be aggregated.

Example 1: Chloe turns age 73 this year and is required to take a RMD for 2024. In late 2023, Chloe purchased an annuity with $300,000 of her funds in IRA-A that started paying her a monthly benefit of $1,500 in January 2024. As of December 31, 2023, Chloe also had $200,000 in IRA-B which is invested in mutual funds. For 2024, Chloe will receive $18,000 ($1,500 x 12) of annuity payments from IRA-A, and that will satisfy her RMDs for IRA-A. However, under the old RMD rule, Chloe would also have to take a separate RMD of $7,547.17 ($200,000/26.5) from IRA-B. Her total RMD would be $25,547.17.

SECURE 2.0 changes this rule by allowing RMDs for the annualized IRA and the other (non-annuitized) IRA funds to be aggregated. To do this, the prior-year 12/31 value of the annuitized IRA and the other funds are combined, and this sum is divided by the applicable life expectancy factor. This becomes the total RMD for the year. The amount of annual annuity payments are then subtracted from the total RMD to determine how much of the total RMD remains and must be taken from the other IRA accounts.

Example 2: If the value of Chloe’s annuity as of December 31, 2023 was $300,000, under the new rule, her total 2024 RMD would be $18,867.92 [($300,000 + $200,000)/26.5]. $18,000 of that total RMD would be satisfied by the IRA-A annuity payments, requiring Amy to take only $867.92 from IRA-B. Her 2024 total RMD is about $6,700 less than under the old rule.
However, there’s a big problem: To use the new rule, the RMD for the annuitized part must be calculated using the usual rule (prior-year 12/31 account balance divided by the owner’s life expectancy factor). But that requires a valuation of the annuity as of the prior 12/31. The annuity provider is supposed to report the fair market value of annuities annually on Form 5498. However, once an annuity is annuitized, that doesn’t always happen. It’s possible the IRS will allow valuations to be obtained in other ways, but there hasn’t been any guidance on that yet. So, unless the insurance company can provide a proper valuation, it would be risky to use the new RMD rule.

https://www.irahelp.com/slottreport/new-law-could-reduce-rmd-rules-annuitized-annuities-%E2%80%93-proper-valuation-needed

529 PLANS AND INHERITED IRAS: TODAY’S SLOTT REPORT MAILBAG

Question:

I have two questions regarding the 15-year requirement that applies to new rules allowing rollovers from 529 plans to Roth IRAs. If you change beneficiaries, will it reset the 15-year clock? Secondly, if you roll your 529 plan into another 529 plan (say Virginia plan to Nevada plan which also involves a change in custodians), does this reset the 15-year clock? No new money is going into the plans and the change in beneficiaries is to  other children and grandchildren.

Thanks for your consideration. We are excited to act on this new SECURE Act provision.

Scott

Answer:

Hi Scott,

You are not alone! Many people are excited about using the new SECURE 2.0 rules allowing rollovers from 529 plans to Roth IRAs. The devil is in the details here though. The rules say that the 529 plan must be established for at least 15 years. It is unclear whether a change of beneficiaries or even transfer to a new custodian would result in a reset of the 15-year holding period. Unfortunately, we will still need some guidance from the IRS on these questions.

Question:

My client was forced to take a distribution from his inherited IRA (non-spousal). He has a huge check coming his way for several hundred thousands of dollars. I was wondering what the best course of action is for the client to take at this point. Can the client roll the money into his own IRA?

Any help would be greatly appreciated.

Jim

Answer:

Hi Jim,

This is a tough situation. The rules do not allow a nonspouse beneficiary to roll over inherited IRA funds to either another inherited IRA or to his own IRA. This is, unfortunately, a taxable distribution that cannot be corrected under the existing IRA rules.

There may be hope for situations like this in the future. SECURE 2.0 expanded the Employee Plans Compliance Resolution Program (EPCRS) to cover IRA errors for the first time. The EPCRS expansion could allow a nonspouse IRA beneficiary to return an inherited IRA that had been mistakenly distributed. This would allow a remedy for one of the most common IRA errors that cannot currently be fixed. Unfortunately, the correction program isn’t available yet for IRAs.

https://www.irahelp.com/slottreport/529-plans-and-inherited-iras-todays-slott-report-mailbag

HOW DO YOU REPORT 2023 ROTH IRA CONTRIBUTIONS ON YOUR TAX RETURN? THE ANSWER MAY SURPRISE YOU

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

Did you make a Roth IRA contribution for 2023? If you have not, you still have some time. The deadline for making a prior year contribution is the tax-filing deadline, not including any extensions you might have. For 2023, that deadline is April 15, 2024.

If you have made a Roth IRA contribution for 2023, or are still planning to make one, you may be wondering where to report Roth contributions on your federal income tax return. The answer may surprise you. Roth IRA contributions are NOT reported on your tax return. When you look at the 2023 Form 1040 and its instructions (as well as all the other schedules and forms that go along with it), you will not find a place to report Roth contributions. You can find a place to report deductible contributions to Traditional IRAs and a place to report nondeductible Traditional IRA contributions. Conversions in 2023 from Traditional IRAs to Roth IRA, including back-door Roth IRA conversions, also need to be reported on the tax return. But there is no place for reporting 2023 Roth IRA contributions.

While you do not need to report your 2023 Roth IRA contributions on your return, it is important to understand that the IRA custodian will be reporting these contributions to the IRS on the 2023 Form 5498. You will get a copy of this form for your own information, but you do not need to file it with your federal income tax return.

Even though you do not need to report your 2023 Roth IRA contributions on your tax return, you should still keep track of them. Your tax preparer (or tax software) can help you with this. Roth contribution information is important when you take distributions from your Roth IRA. Your Roth IRA contributions are always available to you both tax- and penalty-free. These funds are considered to be the first funds distributed from your Roth IRA. Once your contributions are all gone, then converted funds are distributed, and then earnings. If you take a distribution of converted funds from your Roth IRA, there may be penalties that apply. A distribution of Roth IRA earnings can be both taxable and subject to penalty if a Roth distribution is not qualified (i.e., after 5 years and age 59 ½). By tracking your Roth IRA contributions, you can limit your Roth distributions to the amount of your tax-year contributions and thereby ensure that they are always both tax- and penalty-free.

Of course, the best move is to avoid taking any distributions at all from your Roth IRA until you reach retirement age. If you wait and take qualified distributions, then everything in your Roth IRA, including years of earnings, will be tax-and penalty-free. And that, after all, is the goal of saving with a Roth IRA.

https://www.irahelp.com/slottreport/how-do-you-report-2023-roth-ira-contributions-your-tax-return-answer-may-surprise-you

ROTH IRA FOR A TEENAGER – AN ASTRONOMICAL RESULT?

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

 

The mailman delivered my son’s 2023 W-2 the other day. I was curious what he earned last year as a lifeguard at our community pool, so I opened the envelope. Box 1, “Wages, tips, other compensation” said $4,500. Not too bad for a teenager working a summer job – especially since he never spends a dime. (While past performance is not indicative of future returns, I can’t imagine ever needing to establish a trust with a spendthrift clause to protect the kid from himself. He throws around nickels like manhole covers.)

 

Regardless of his frugality, the point of my W-2 interest was to see how much he could contribute to a Roth IRA. He is light years away from the Roth IRA income phaseout levels, so no concerns there. In 2023, the married/filing joint phaseout was $218,000 – $228,000 and $138,000 – $153,000 for single filers. (For 2024, those numbers jump to $230,000 – $240,000 and $146,000 – $161,000, respectively.)

 

While the maximum Roth IRA contribution amount for 2023 was $6,500 (or $7,500 for anyone age 50 or older), a person cannot contribute more than what he earned. So, the most my son could contribute to a Roth IRA as a prior-year contribution is what was listed in Box 1 on his W-2: $4,500. What if he mowed lawns all summer and made $4,500 “under the table”? Unless he claimed those dollars as taxable income, they would not qualify for an IRA contribution.

 

As for the task of funding the Roth IRA – does it matter where the $4,500 comes from? It does not. The IRS does not care if I fund my son’s Roth IRA for him, or if a grandparent funds his Roth IRA, or if a rich neighbor gives him $4,500 for the contribution. The IRS is only concerned about my son not exceeding what was reported in Box 1 on his W-2. If a grandparent or a rich neighbor were to make the $4,500 contribution, no special tax reporting is necessary. Cash gifts, each up to the 2024 gift tax cap of $18,000, can be made to an infinite amount of people, related or not, and no special forms are required.

 

To summarize, he had taxable compensation of $4,500 in 2023. His Roth IRA contribution for that amount (coupled with his existing account dollars), brought his total Roth IRA balance up to an even $10,000. The Roth IRA is invested in quality mutual funds with a more aggressive tilt. With a few clicks on a financial calculator, the powers of compounding (or what Albert Einstein called “the 8th wonder of the world”), are revealed.

 

Assuming not a single additional penny is ever contributed to his $10,000 Roth IRA:

  • $10,000 at 6% annual growth after 40 years? $102,857
  • $10,000 at 8% annual growth after 40 years? $217,245

 

What if he contributed just $5,000 each year for the next decade, but then stopped contributing for the remaining 30 years?

  • $10,000 now, plus $5,000 for 10 years, at 6%, after 40 years? $481,373
  • $10,000 now, plus $5,000 for 10 years, at 8%, after 40 years? $946,111

 

If you have the means, a little can become a lot. It’s not about timING the market, it’s about time IN the market. If a teenager starts early, the long-term benefits could be astronomical.

https://www.irahelp.com/slottreport/roth-ira-teenager-%E2%80%93-astronomical-result

BACKDOOR ROTH IRA CONVERSIONS AND THE ANNUAL RMD REQUIREMENT: TODAY’S SLOTT REPORT MAILBAG

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

 

Question:

Is it possible to do a Backdoor Roth IRA conversion with a SEP IRA? If yes, how does it work?

Thank you!

Yulia

Answer:

Hi Yulia,

Yes, you can do a Backdoor Roth IRA conversion with a SEP IRA. You would simply contact the IRA custodian and request the conversion. If the SEP IRA is pre-tax and you have no after-tax IRA funds, then the converted amount is fully taxable in the year of conversion. If you do have after-tax funds, a portion of the conversion is tax-free under the pro-rata rule.

Question:

My mother was taking required minimum distributions (RMDs) until she passed in 2023. Her three children are the beneficiaries of her IRA. Do the children have to take annual RMDs, or can they take distributions anytime during the 10-year period as long as all monies are removed before 10 years? I have gotten several answers on this.

Answer:

These rules are confusing, so we’re not surprised you’ve gotten conflicting answers. The IRS has said that beneficiaries subject to the 10-year payout rule (like you and your siblings) must take annual RMDs during the 10-year period if the IRA owner died after starting RMDs. Because this rule surprised and confused many people, the IRS waived RMDs for 2021-2023 for beneficiaries in this situation. It’s possible the IRS will do that again for 2024, so you and your siblings should wait until later this year before taking the 2024 RMD to see if it is waived.

https://www.irahelp.com/slottreport/backdoor-roth-ira-conversions-and-annual-rmd-requirement-today%E2%80%99s-slott-report-mailbag

529 PLANS AND QUALIFIED CHARITABLE DISTRIBUTIONS: TODAY’S SLOTT REPORT MAILBAG

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

QUESTION:

I have been funding a 529 account for over 15 years and no longer need to add deposits.

Could I change the beneficiary to myself and then convert to a Roth IRA, assuming I have met the 5-year deposit hurdle as well? Has the government ruled on when the clock starts for the 15 years? Meaning, is it from when you open the account or does it restart when you change the beneficiary?

Thanks!

ANSWER:

This question is timely as I wrote an article about this topic just yesterday for the Slott Report. The link is here: https://www.irahelp.com/slottreport/529-roth-now-available-questions-persist

529 dollars can be rolled to a Roth IRA for the 529 beneficiary, but only after the 529 account has been open for at least 15 years. Yes, you can change the beneficiary of the 529 to yourself, but we still do not know if that will result in a reset of the 15-year clock. As such, it might be best to delay any beneficiary changes until we have definitive guidance from the IRS.

QUESTION:

Once the beneficiary of an inherited IRA has reached 70 ½, is the beneficiary eligible to make qualified charitable distributions (QCDs) annually?

Dale

ANSWER:

Dale,

Yes, QCDs can be done from an inherited IRA once the inherited IRA beneficiary is age 70 ½ or older. All the normal QCD rules apply – like the fact a person must actually be 70 ½ to do the QCD. It is not good enough to be turning 70 ½ later in the year. Also, it does not matter how old the original IRA owner was when they passed away. That has no bearing on QCD eligibility from the inherited IRA. (Note that the QCD limit is indexed for inflation and has been adjusted to $105,000 for 2024.)

https://www.irahelp.com/slottreport/529-plans-and-qualified-charitable-distributions-todays-slott-report-mailbag

RMD CALCULATION AND TRUSTS FOR DISABLED BENEFICIARIES: TODAY’S SLOTT REORT MAILBAG

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

Question:

Hoping you can help with this technical question. I am over 73. My traditional IRA balance as of 12/31/22 was $0.00. I made a $7,500 non-deductible traditional IRA contribution in 2023 and converted the full balance ($7,508.23, including $8.23 of interest) to a Roth IRA in 2023. I did not do an RMD prior to the conversion, but I did not have a traditional IRA balance at the end of 2022 and my 2023 traditional IRA contribution was non-deductible.

Should I have taken an RMD prior to the conversion?

Answer:

Because you did not have a balance in your traditional IRA as of 12/31/22, you did not have an RMD for 2023. (If you had an RMD for 2023, you would have needed to take the RMD before doing the Roth conversion.)

Question:

I am 79, and my regular IRA and Roth IRA (started in 2001) both name my revocable trust as sole beneficiary.  My trust has a single beneficiary, my disabled daughter, aged 49, who receives SSDI.  At my death, what are the distribution requirements currently? (My daughter cannot manage her own affairs.  The trustee would handle the assets.)

Jeff

Answer:

Hi Jeff,

Since she qualifies as “disabled” under the strict tax code definition, your daughter is considered an “eligible designated beneficiary” under the SECURE Act inherited IRA rules. Therefore, assuming the trust qualifies as a “see-through trust,” RMDs can be paid out from both the traditional and Roth IRA to the trust over your daughter’s single life expectancy.

https://www.irahelp.com/slottreport/rmd-calculation-and-trusts-disabled-beneficiaries-today%E2%80%99s-slott-reort-mailbag

NEW ROTH PROVISIONS EFFECTIVE IN 2024

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

When the bell dropped in Times Square last Sunday night, a bunch of new provisions from the SECURE 2.0 legislation kicked in. This article will focus on the Roth-related changes that are effective in 2024.
529-to-Roth IRA Rollovers

Under the tax rules, if funds in a section 529 plan are not used for education, the earnings are taxable and subject to a 10% penalty. This has scared many people away from funding 529 plans. As a way of relieving these fears, Congress included a provision in SECURE 2.0 that allows for rollovers of unused 529 funds to Roth IRAs. While this a worthy idea, beware of important restrictions on this new rollover rule.

  • The maximum amount that can be rolled over from a 529 account to a Roth IRA is $35,000. There is currently no indexing of this limit for inflation. The $35,000 limit is a lifetime maximum, and it appears to apply per beneficiary.
  • The Roth IRA must be in the name of the 529 beneficiary – not the 529 owner (if the owner is different from the beneficiary).
  • The 529 plan must have been open for more than 15 years. The IRS still hasn’t said whether a new 15-year waiting period is required when a 529 is transferred to a new beneficiary.
  • Rollover amounts cannot 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, no more than $7,000 can be rolled over from a 529 to a Roth IRA in 2024. The effect of this rule is that it would take several years to do a full $35,000 529-to-Roth IRA rollover.
  • Any 529-to-Roth rollover would count towards the IRA contribution limit in effect for that year. For example, a beneficiary doing a $5,000 rollover from a 529 plan in 2024 can only make an additional $2,000 IRA (or Roth IRA) contribution for 2024. Further, a 529 beneficiary doing the rollover must have compensation in the year of the rollover at least equal to the amount being rolled over.

 

No RMDs on Roth 401(k) Funds

Before 2024, one big advantage that Roth IRAs had over Roth funds in 401(k) (and other company plans) was that Roth IRA owners never have to take RMDs, but Roth 401(k) account holders did. SECURE 2.0 does away with this distinction by exempting Roth 401(k) funds from lifetime RMDs.

 

Keep in mind that beneficiaries of inherited Roth 401(k)s are still subject to RMDs. Also, even with this change, rolling over Roth 401(k) funds to a Roth IRA might still make sense because of more favorable Roth IRA distribution rules and a wider variety of investment options.

 

Mandatory Roth 401(k) Catch-Ups – DELAYED

January 1, 2024 was originally supposed to be the effective date of the SECURE 2.0 rule requiring that age-50-or-older catch-up contributions by highly-paid employees to 401(k) (and other plans) be made on a Roth basis. But, in the face of persistent complaints by recordkeepers and lobbying groups, the IRS delayed the effective date of this rule until 2026.

https://www.irahelp.com/slottreport/new-roth-provisions-effective-2024

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

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

Question:

I have a traditional IRA with a portion being nondeductible contributions. The last nondeductible contribution I made was in 2009. and I have my Form 8606 showing the basis.  I want to convert a portion of my traditional IRA to a Roth IRA. Can I convert all of the nondeductible amount plus some of the before-tax contributions to a Roth IRA?  I have never taken any distributions from my traditional IRA. I’m 52 years old.

Thanks,

Jeff

Answer:

Hi Jeff,

Good job with tracking your basis. Many people do not file Form 8606 and some even end up paying taxes again on IRA funds that were already taxed.

Unfortunately, you cannot choose to convert just the after-tax portion of your IRA funds. Instead, a pro rata formula applies, and a portion of any IRA distribution you take (including a conversion) would include a percentage of those after-tax dollars. The remaining portion would be taxable. You can see exactly how this formula works by taking a look at Form 8606.

Question:

My estate planning lawyer tells me that my 6 year old granddaughter is not required to take her inherited IRA RMDs until she comes of age. I disagree, but I am unable to find an answer.  Thanks for your help.

Regards,

Harold

Answer:

Hi Harold,

The SECURE Act changed the rules for nonspouse beneficiaries, and there is a lot of confusion as to how the new rules work for minors. Minor children of the account owner can still use the stretch and take annual required minimum distributions over their life expectancy. This is only allowed until they reach age 21, and then the 10-year rule will apply. Grandchildren do not get the stretch at all. Grandchildren would be subject to the 10-year rule immediately upon the death of the IRA owner.

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

TWO HOLIDAY LISTS

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

The SECURE 2.0 Act contained over 90 sections and included numerous IRA and retirement account changes. Additionally, the legislation incorporated staggered effective dates over multiple years. Here is a list of 10 items from the Act scheduled to come on-line in 2024:

 

1.     IRA catch-up contributions will now be indexed for inflation.

2.     The QCD (qualified charitable distribution) $100,000 limit is also indexed for inflation.

3.     Matching plan contributions can be made on student loan payments.

4.     New 10% penalty exception: Emergency expenses. (For plans and IRAs. $1,000/year.)

5.     New 10% penalty exception: Employers can offer emergency savings accounts as an add-on to a work plan – like a 401(k). (For plans only. $2,500 maximum deferral.)

6.     New 10% penalty exception: Domestic abuse. (For plans and IRAs. Limited to $10,000.)

7.     Higher SIMPLE plan limits for deferrals, catch-ups and nonelective contributions.

8.     529-to-Roth IRA rollovers allowed, but with a $35,000 lifetime limit.

9.     No lifetime required minimum distributions (RMDs) on plan Roth accounts.

10.  Surviving spouse may elect to be treated as deceased spouse. (Details still to be worked out.)

 

Of course, we will write about these and other topics in future Slott Report entries. Until then, from the Ed Slott team, here is a list of 10 far-more-important things:

 

1.     Happy Holidays!

2.     Peace and Joy!

3.     Merry Christmas!

4.     Happy Hanukkah!

5.     Buon Natale!

6.     Joyous Kwanzaa!

7.     Yuletide Greetings!

8.     Mele Kalikimaka!

9.     Feliz Navidad!

10.  Season’s Greetings!

 

Thank you for reading, and all the best.

https://www.irahelp.com/slottreport/two-holiday-lists

SECURE 2.0 RELAXS RETROACTIVE SOLO 401(K) RULES

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

Thinking of opening up a new solo 401(k) plan for 2023? Thanks to SECURE 2.0, you don’t have to rush to get it done by year end.

A solo 401(k) is an excellent retirement savings vehicle for self-employed business owners with no employees (other than their spouse). That’s because the IRS says that a business owner with a solo (k) actually wears two hats – one as an employee and one as an employer. As an employee, he can make elective deferrals up to $22,500 for 2023, or $30,000 if age 50 or older. (Those limits will jump to $23,000/$30,500 for 2024.)  As an employer, he can also make additional contributions up to 20% of adjusted net earnings. Keep in mind that there’s an overall limit on combined elective deferrals and employer contributions. For 2023, that maximum is $66,000, or $73,500 if the additional $7,500 is deferred. (For 2024, those limits increase to $69,000/$76,500.) For many business owners, a solo 401(k) allows for much higher contributions than are possible under a SEP or SIMPLE IRA.

For sole proprietors (and single-member LLCs) looking to open up retroactive solo 401(k)s, SECURE 2.0 closed a loophole from the original SECURE Act. The SECURE Act gave businesses extra time (until the due date for the corporate tax return, including extensions) to establish retroactive retirement plans. So, for example, a business could open up a new plan for 2022 as late as September 15 or October 15, 2023, depending on the type of business. (Before this SECURE Act change, new plans had be in place by the end of the year.) The problem with this extended deadline was that it was available only for employer contributions – not for elective deferrals. This meant a sole proprietor could open up a solo 401(k) in 2023 retroactively effective for 2022, but only if the plan had just employer contributions – not elective deferrals.

SECURE 2.0 corrects this by allowing sole proprietors to establish retroactive solo plans with both employer contributions and elective deferrals. But be careful: The deadline for adopting a new solo plan after its first year with both kinds of contributions is the due date of the individual’s tax return without extensions for the prior year.

Example: Rick is a sole proprietor with a lawn-mowing business. In February 2024, Rick hears about solo 401(k) plans from a financial advisor and wants to set up a new plan retroactively for 2023. As long as the plan is opened by April 15, 2024 (the business’s 2023 tax filing, without extensions), Rick could fund the plan with both 2023 employer contributions and elective deferrals.

https://www.irahelp.com/slottreport/secure-20-relaxs-retroactive-solo-401k-rules

SUCCESSOR BENEFICIARY RULES AND NEW SPOUSE BENEFICIARY RULES: TODAY’S SLOTT REPORT MAILBAG

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

Question:

My sister inherited an IRA from our mother (age 95 and died in 2019.) My sister took her RMDs (required minimum distributions) from this inherited account over her life expectancy. My sister died in 2021, leaving me as her beneficiary of this inherited IRA. My sister had already taken her 2021 RMD before her death.  Not knowing, I took an RMD in 2022 by just dividing her 12/31/21 value by 10. Now I am uncertain what to do for my RMD in 2023. What schedule do I use now for the RMD in 2023?  Also, does the account need to be depleted by the end of 2031 or 2032?

Thank you.

Carol

Answer:

Hi Carol,

You are a successor beneficiary – the beneficiary of a beneficiary. Since your sister (the first beneficiary) died after 2019, you are subject to the 10-year payout rule. This requires you to empty the account by no later than 12/31/31. The IRS issued rules that also require you to continue annual RMDs during the 10-year period (starting in 2022) based on your sister’s life expectancy. (You essentially “step into her shoes” and continue with her same life expectancy factor, minus 1 each year.) However, because of the confusion caused by those rules, the IRS has waived annual RMDs for 2022 and 2023 (the first two years of the 10-year period).

Question:

Thank you for all the good information you all make available. I particularly enjoyed Ian Berger’s recent summary of “SECURE 2.0’s Biggest Mess.”

We have a client whose husband passed away in 2022 at the age of 60. The client opted to establish an inherited IRA because she’s under 59 1/2. Is it correct that she’s subject to section 327 of SECURE 2.0 even though her husband died in 2022? And if so, should she choose not to elect to defer RMDs until he would have turned 73, will her RMDs beginning in 2024 be based on the IRS Uniform Lifetime Table using her age, or will she be subject to the 10-year rule?  And is there a form for the election, or is that election simply made by how the account is distributed?

Best regards,

Doug

Answer:

Hi Doug,

The new rules for spouse beneficiaries in section 327 apply only to deaths after 2023, so your client is not affected. If your client’s husband had died in 2024 or later and your client wanted to start RMDs in the year following the year of death, she could stretch RMDs over her lifetime, and they would be calculated using the IRS Single Life Expectancy Table. No election would be necessary. An election would only be necessary if she chose to defer RMDs until the year her husband would have reached age 73 or 75 (depending on his birth year).

https://www.irahelp.com/slottreport/successor-beneficiary-rules-and-new-spouse-beneficiary-rules-today%E2%80%99s-slott-report

BAD SANTA & THE GRINCH OFFER HORRIBLE IRA ADVICE – PART 2

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

The investment advisory firm of Bad Santa & the Grinch continues to disseminate misinformation and lousy, no good, rotten-to-the-core IRA advice. As we saw in “Bad Santa & The Grinch Offer Horrible IRA Advice – Part 1” (Slott Report, November 29), these two unsavory characters take great joy in fouling up not only your holiday, but also the qualified status of IRAs. Here are more fish bones, brown banana peels, coffee grinds and raccoon meals from their dented trash can of “IRA assistance.”

Bad Santa: UNDER 59.5 and converting your IRA? Have the taxes withheld and it will be a glorious Roth day! No, sir. Bad advice. For anyone doing a Roth conversion under age 59 ½, do NOT have taxes withheld from the IRA. Why? Those taxes never get converted. Technically, they are an early withdrawal and will be subject to a 10% penalty (assuming no exception applies). Be sure to have available cash from another account to cover the taxes due.

The Grinch: A Backdoor Roth is a marvelous technique, to cherry-pick dollars for the tax-free conversion you seek. Untrue. For anyone with a mix of pre-tax and after-tax (non-deductible) dollars in the combined total of ALL their IRAs, SEPs and SIMPLE plans, the pro-rata rule must be considered. You definitively cannot cherry-pick the after-tax dollars for conversion. Pro-rata dictates that any conversion will include a mix of pre- and after-tax dollars based on the ratio between the two.

Bad Santa: 60-day rollovers are the best way to go – and you can do as many as you want – how could you not know? No, and no. The safest way to move money between IRA accounts is via direct transfer. This is a non-reportable transaction that eliminates the possibility of missing the 60-day rollover window and all the consequences that follow. Additionally, while direct transfers are unlimited, you can only do one 60-day IRA-to-IRA rollover per 12 months. Try to do another within that period and it will be a distribution that cannot be reversed.

The Grinch: Within your IRA, buy a cozy Swiss chalet, and when you vacation at that location, ‘twill be a wondrous stay. No, it will not, because this is a prohibited transaction. You cannot use IRA money, while it is within the IRA, to benefit you personally. Owning a rental property within your IRA is perfectly acceptable, but you cannot use the property. In fact, your spouse cannot stay at the property nor can any lineal decedent (e.g., children, parents) as they are all considered “disqualified persons.” This will result in a complete distribution of the account.

Bad Santa: ‘Tis the season for giving, and the halls we shall deck. Then late in the year, write your QCD check. For those with checkbook IRAs, it is not a good idea to wait until the last minute to write your QCD (qualified charitable distribution) check to charity. Why? The custodian may not recognize the distribution until after the check is cashed. Checks written to a charity will qualify as a QCD, but the check must be cashed before year end to qualify for 2023.

Bad Santa & the Grinch can wreck an IRA – which would surely put a damper on the holiday. Shake your presents and listen. Bad-advice snakes could be boxed up and hissin’! Like the terrible, no-good guidance above, such “gifts” are delivered with absolutely no love. Let’s hope Bad Santa and the Grinch find their way. Maybe their hearts will grow three sizes someday.

QCDS AND THE ROTH 5-YEAR CLOCK: TODAY’S SLOTT REPORT MAILBAG

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

QUESTION:

My brother passed away in May 2023. He had a small IRA with no beneficiary. He was 73 at the time of his death. His estate is to be divided equally among his eight brothers and sisters, ranging in age from 61 to 77. He was passionate about a small wildlife research project in his later years and some of the beneficiaries would like to transfer their benefit to the nonprofit. 1. Can you make charitable donations out of an inherited IRA? 2. Can each beneficiary, no matter their age, make the donation because the original owner was over 70 ½ and taking RMDs, or do they have to take the distribution, recognize it as income, and make the charitable donation individually?

Thanks for your input.

Kathie

ANSWER:

Kathie,

Bad news first, then some possible good news. Since the estate is the beneficiary, we would typically be forced to open an estate-owned inherited IRA and follow the rules applicable to estate beneficiaries. One such rule is that estates cannot do QCDs (qualified charitable distributions) because an estate does not have an age. Yes, QCDs can be done from inherited IRAs owned by living people who are 70 ½ or older, but estates are not living people. As such, in order to get IRA dollars to the wildlife research project, taxable distributions would need to be paid out of the estate-owned inherited IRA to an estate account, and then distributed to the estate beneficiaries. These dollars could then be donated to the charity, and the taxpayer would follow the standard charitable donation rules.

On the bright side, we have seen situations where IRA custodians have allowed individual inherited IRAs to be established for the estate beneficiaries. (See my Slott Report entry from October 18, 2023, “Estate Bypass – Spousal Rollover when the Estate is Beneficiary.”) Referred to by some as an “estate bypass,” these accounts must still follow the payout rules (5-year rule or “ghost rule”) applicable to the estate beneficiary, but at least the estate can be closed and the estate beneficiaries will have their own inherited IRAs. Here is where things get murky. Assuming the custodian allows the estate bypass (it is no guarantee), an argument could be made that, since the new inherited IRA owner is now a living person with an age, a QCD could be done if the IRA owner is age 70 ½ or older. There is no official governing rule for this, but in the spirit of giving – and assuming the estate bypass is allowed – I think it could be acceptable. You may want to discuss this with the attorney who is handling the estate.

QUESTION:

Hi Team Slott,

My wife and I converted a portion of our traditional IRAs in 2010 when the opportunity first was available for higher earners and the tax liability could be spread over two years. My wife recharacterized the entire balance before the deadline in October 2011 and has had no Roth balance since then – no contributions or conversions. She continues to be a skeptic of Roth IRAs – which I use as I’ve learned from your team. She hates to pay taxes in advance. I’m concerned whether the 2010 Roth conversion started her five-year clock given the recharacterization and subsequent zero balance. Maybe I will finally convince her to do Roth conversions. She also might inherit Roth accounts should I pre-decease her. I’d hate for her to need to start a new five-year clock in either of these latter two scenarios. We are currently age 68. Does her 2010 Roth clock still work? I do have the paper statements documenting that account.

Thanks for your deep knowledge.

Sincerely,

Steve

ANSWER:

Steve,

Your wife’s Roth 5-year clock has not started. Since she recharacterized her conversion back in 2010/2011, she essentially erased the original transaction. And since she has made no Roth IRA contributions or done any conversions, in the eyes of the IRS she has never had a Roth IRA. Interestingly, if a person were to open and fund a Roth IRA, but then subsequently take a full withdrawal and close the account, that would still start (and maintain) the 5-year clock. As for your concern about your wife needing to start her own 5-year clock in the event of you predeceasing her, that is not an issue. If you were to predecease her, the Roth IRA distribution rules allow her to leverage your existing 5-year clock.

https://www.irahelp.com/slottreport/qcds-and-roth-5-year-clock-todays-slott-report-mailbag

CONGRESS MAKES SIMPLE IRA PLANS LESS SIMPLE

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

SIMPLE IRA plans are a popular retirement savings option for small businesses. The plans are available for companies with 100 or fewer employees who received at least $5,000 in pay from the company in the prior year.

SIMPLE IRAs are designed to be administratively easier than 401(k) plans. Businesses can establish a SIMPLE by completing a model IRS form (either Form 5305-SIMPLE or 5304 SIMPLE) and can make contributions directly to employees’ IRAs.

However, the rules governing SIMPLE IRA plans are confusing. How so? In some cases they are treated like IRAs, and in other cases they are treated like workplace plans. Also, SIMPLE IRAs and SEP IRAs differ in certain respects.

One area where SIMPLE IRA plans are about to get less “SIMPLE” is the contribution limits. SIMPLE plans allow for both elective deferrals and employer contributions. The employer contribution can be a matching contribution for employees who make salary deferrals. The match is a dollar-for-dollar match on deferrals, taking into consideration deferrals up to 3% of pay. Or, the employer contribution can be an across-the-board contribution for all eligible employees equal to 2% of pay.

The elective deferral limits have traditionally been a maximum amount for employees under age 50 and an additional “catch-up” amount for those age 50 or older.  For 2023, the under-50 dollar limit was $15,500 and the catch-up limit was $3,500. Both of those limits are adjusted periodically to reflect cost-of-living increases. The IRS has announced that for 2024 the under-50 limit will go up to $16,000, while the catch-up will remain at $3,500.

Easy enough, but Congress just had to complicate things in the SECURE 2.0 Act of 2022. Starting in 2024, both the under-50 limit and the catch-up limit will increase by 10% above the $16,000/$3,500 limits – but only for businesses with 25 or fewer employees. So, for those very small companies, the 2024 under-50 limit is actually $17,600 ($16,000 x 10%), and the catch-up limit is $3,850 ($3,500 x 10%). And it gets worse.  Businesses with 26-100 employees can elect the extra 10%, but only if they provide a 4% (instead of 3%) matching contribution or a 3% (instead of 2%) across-the-board contribution.

Unfortunately, it gets even worse. Also beginning in 2024, SIMPLE IRA employers can make an additional employer across-the-board contribution to all employees who have at least $5,000 of pay for the year. This additional contribution can be up to 10% of pay, but no more than $5,000. It is available even for companies that make their “regular” employer contribution as a match.

These increased limits may be welcome news for SIMPLE IRA participants looking to increase their savings. But SIMPLE? Hardly.

https://www.irahelp.com/slottreport/congress-makes-simple-ira-plans-less-simple

DEADLINE TO TAKE YOUR 2023 RMD IS ALMOST HERE

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

It is December. The halls are decked, and Starbucks holiday cups are everywhere. The end of the year is not far away. That means the deadline is near for taking a required minimum distribution (RMD). Here is what you need to know if you have your own IRA or if you are an IRA beneficiary.

Your IRA

The SECURE Act and SECURE 2.0 have delayed the age for RMDs. In 2023, if you have an IRA (including a SEP or SIMPLE IRA) and you are age 73 or older this year you must take an RMD by December 31. Roth IRA owners catch a break. No RMDs are required during your lifetime if you have a Roth IRA.

Your Inherited IRA

If you have an inherited IRA, you may need to take an RMD by December 31, 2023. While Roth IRA owners do not ever need to take RMDs, Roth IRA beneficiaries do.

After the SECURE Act, many beneficiaries find themselves subject to a 10-year payout. Under IRS proposed regulations, some beneficiaries of traditional IRAs subject to the 10-year rule must also take annual RMDs.

This has caused great confusion and, as a result, the IRS has granted some relief. In 2022, the IRS issued Notice 2022-53, which waived penalties for missed 2021 and 2022 RMDs within the 10-year period. Notice 2023-54 extends the penalty waiver to cover missed 2023 RMDs within the 10–year period. These missed RMDs within the 10-year period will not have to be made up.

Notice 2023-54 does not affect lifetime RMDs, inherited IRAs by eligible designated beneficiaries (EDBs), or RMDs by beneficiaries who inherited before 2020. If you fall into one of these categories as a beneficiary, you must still take your RMD for 2023 by December 31, 2023.

The Clock is Ticking

If you need to take a 2023 RMD from your IRA, the clock is ticking. It is best to get it done sooner rather than later. Many IRA custodians have earlier internal deadlines. There is no reason to wait until the last minute because that is when things can go wrong.

Remember, there is no credit for distributions taken in prior years. Make sure if you are a beneficiary that you take any required 2023 RMD, especially Roth IRA beneficiaries. These RMDs are often missed. Double check your RMD transactions by year end to be sure everything was done correctly.

Every year, people miss RMDs. The result can be a 25% penalty on the amount not taken. Don’t let this happen to you. Now is the time to hustle and take your 2023 RMD, if you haven’t already.

https://www.irahelp.com/slottreport/deadline-take-your-2023-rmd-almost-here

BAD SANTA & THE GRINCH OFFER HORRIBLE IRA ADVICE – PART 1

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

If the Grinch and Bad Santa both passed their FINRA Series 7 exam and decided to open an investment advisory firm, I’m pretty sure they would combine forces to intentionally deliver some of the WORST financial advice possible. Here are some of their truly terrible, hideously horrible, good-for-nothing planning ideas:

Bad Santa: “Everything on TV and the internet is TRUE. Invest your IRA in gold coins that you can run your fingers through.” Be careful! If you have gold coins or bullion in your IRA, those coins must be in the custody of a qualified trustee or custodian. If they are tumbling through your fingers like on the commercials, there is a good chance you have a taxable distribution – along with all the normal under-age 59 ½ penalty consequences.

The Grinch: “Don’t worry about liquidity for IRA RMDs – the IRS is here to please.” Untrue! Liquidity for required minimum distribution (RMD) purposes is a big concern for some IRA owners. You have a beachfront investment property in your IRA, but no cash? That in and of itself is perfectly acceptable. But if you are subject to RMDs, you can’t cleave off the balcony for distribution, so you better figure out how to either generate some cash within the IRA, or identify how you might leverage the IRA RMD aggregation rules. The IRS does not care about your liquidity issues. The RMD must be taken, and it is the IRA owner’s responsibility to do so.

Bad Santa: “Rental property in a Roth IRA? Access your tax-free rental income today!” No, sir! Rental income within a Roth IRA is simply “earnings,” like dividends or capital gains or stock appreciation. Additionally, Roth IRAs follow strict ordering rules – contributions come out first, then converted dollars, and then earnings – so you can’t just target and withdraw the rents. Plus, Roth IRA owners must follow the standard 5-year clock rules. “Rental income” definitively does NOT get to bypass all the normal Roth IRA distribution guidelines.

The Grinch (with his evil snarl): “Roth conversions are best left to the last day of the year. Until then, enjoy some holiday cheer.” Nope. Untrue. The deadline for a Roth conversion is December 31. If you want to do a Roth conversion in the 2023 tax year, it must be initiated before the calendar changes. And some custodians will set their internal Roth conversion cutoffs even earlier to ensure they don’t get buried with last-minute requests. To avoid the possibility of missing the 12/31 deadline, do your Roth conversions sooner rather than later.

Bad Santa: “IRMAA brackets? Pay them no mind. Just do your Roth conversion and all will be fine.” Definitively NOT true! The Medicare Income Related Monthly Adjustment Amount (IRMAA) brackets are a cliff. Just one dollar over, and you can fall into paying more each month. Roth conversions are NOT excluded for IRMAA calculations and can easily push a person into a higher bracket. For anyone 63 or older, be cognizant of this “stealth tax” before doing any conversion.

The Grinch: “Reviewing beneficiary forms is a waste of time. I’d rather sip eggnog mixed with a rotten brown lime.” How many court cases have we seen where people’s lives were turned upside down due to a beneficiary form being forgotten, filled out incorrectly, or never updated? Happens all the time. It may not be glamorous, but an annual review of beneficiary forms could be the most important planning strategy of all.

Where is the SEC oversight?!? Where is the compliance department? Bad Santa and The Grinch are unscrupulous! Come back in a couple of weeks for Part 2 and see if this terrible, no-good advisory team continues to put coal in the IRA stockings of all the Whos down in Whoville.

https://www.irahelp.com/slottreport/bad-santa-grinch-offer-horrible-ira-advice-%E2%80%93-part-1

TURNING BACK THE CLOCKS AND REVISITING THE ROTH IRA FIVE-YEAR CLOCKS

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

A few weeks ago, many of us were required to turn back our clocks one hour and say goodbye to daylight savings time. And with that change came the usual reminder to change the batteries in our smoke detectors. Based on the number of questions we continue to get about the Roth IRA five-year distribution rules, we think that adjusting the clocks should come with another reminder – on how the Roth IRA clocks work.

The confusion about the Roth IRA distribution rules isn’t really surprising since there’s actually two clocks, each used for different purposes and each with different rules.

The First Clock: Is a Distribution of Converted Amounts Subject to Penalty?

The first five-year clock is used for only one purpose: to determine whether a distribution of converted Roth amounts is subject to the 10% early distribution penalty. The good news is that this is not an issue when the person receiving the distribution is age 59 ½ or older since the penalty doesn’t apply. And, even if the person is under 59 ½, the penalty also doesn’t apply if the converted amount has been held for at least five years. This five-year clock actually starts ticking on January 1 of the year of the conversion, so the holding period can be less than five years. To complicate things even further, if someone does more than one conversion, each conversion has its own five-year clock. But if the Roth funds remain untouched until retirement (i.e., beyond age 59 ½) as they should, the first five-year clock won’t ever come into play.

The Second Clock: Is a Distribution of Earnings Subject to Taxes?

The second clock has nothing to do with the 10% early distribution penalty. Instead, it helps determine whether earnings on Roth IRA contributions and conversions are taxable when distributed. This second clock (called the “forever clock” by my colleague Andy Ives) starts ticking on January 1 of the year the person makes her first contribution or conversion to ANY Roth IRA – not necessarily the one where the distribution is coming from. So, there is no separate clock for each contribution or conversion. Getting the forever clock ticking is why it’s so important for everyone to open up a Roth IRA as early as possible – even if funded with a nominal amount. In order for earnings to be tax-free, it’s not enough for this second clock to be satisfied. The person receiving the distribution also must be at least 59 ½ (or disabled or a first-time home buyer). When both conditions are satisfied, earnings come out tax-free in a “qualified distribution.”

But it’s not a tragedy if a Roth distribution is not “qualified.” That’s because the Roth IRA ordering rules say that contributions and conversions are deemed to come out before earnings. This means that someone can always receive a tax-free distribution of an amount equal to their Roth contributions and conversions without even reaching their earnings (in other words, before the second clock even comes into play).

https://www.irahelp.com/slottreport/turning-back-clocks-and-revisiting-roth-ira-five-year-clocks

4 IRA TAX BREAKS FOR WHICH WE GIVE THANKS IN 2023

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

Thanksgiving is almost here! This is a time for us to gather together and express our gratitude for all the good things in our lives. When it comes to our retirement accounts, we frequently complain about the negatives, such as the many IRA rules that are way too complicated and confusing.

It has become a Slott Report Thanksgiving tradition to change it up and take a few moments to give thanks for those IRA rules that work well and help us save for our families’ futures. Here are 4 IRA tax breaks for which we give thanks in 2023.

1. Exceptions to the Early Distribution Penalty: Retirement accounts are supposed to be for saving for retirement. That is why there is a 10% early distribution penalty that applies to distributions taken before age 59 ½. However, life doesn’t always go as planned. Congress has recognized that fact. With the recently enacted SECURE 2.0 law, Congress continues to add to the list of exceptions to the penalty so that younger savers have easier access to their retirement funds. New exceptions now exist for natural disasters and terminal illness. Starting next year, there will also be exceptions for domestic abuse and even a limited exception for financial emergencies. For these exceptions, the many retirement account owners who have faced hard times and unexpected bills are grateful.

2. Everything Roth: Since the Roth IRA first arrived on the scene in 1998 and brought with it a whole new way of retirement savings with tax-free distributions of earnings, Roth savings opportunities have grown. Roth employer plan accounts are now common, and millions of retirement savers have done Roth conversions. With SECURE 2.O, Congress has continued the trend of expanding Roth opportunities, and for this we are thankful.

3. Qualified Charitable Distributions (QCDs): Being charitably inclined is a good thing! We give thanks for QCDs which encourage gifts to charity by allowing tax-free transfers of IRA funds to charities. SECURE 2.0 now allows for QCDs to split- interest entities such as charitable gift annuities. Next year, the annual limit for QCDs will increase from $100,000 to $105,000. We are grateful for all the benefits of QCDs. They not only decrease adjusted gross income, but also can satisfy the year’s required minimum distribution (RMD) requirement.

4. Opportunity to Save More in 2024: No one likes inflation, but when it comes to retirement accounts, there is one bright spot. Inflation has led to some increases to the retirement account contribution limits. 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 $7,000 for those under age 50 and to $8,000 for those who reach age 50 or over in 2024.

https://www.irahelp.com/slottreport/4-ira-tax-breaks-which-we-give-thanks-2023

STILL-TIME-LEFT TO-DO LIST

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

Year-end to-do lists are commonplace. The problem is, they always seem to get published in mid-to-late December. I can almost hear the collective “thanks for nothing” comment from readers as the information arrives too late to act upon. As we are still before Thanksgiving, here are a few year-end items to consider…before it really is too late.

Roth Conversions. The deadline for a Roth conversion is December 31. There is no such thing as a “prior-year conversion.” If you want to do a Roth conversion in the 2023 tax year, it must be initiated before the calendar changes. However, anecdotally, I am hearing that some custodians are setting their Roth conversion cutoffs earlier – like early to mid-December. Any conversion requests that come in after these self-imposed deadlines may not get done. To avoid the possibility of missing the 12/31 deadline, do your Roth conversions sooner rather than later.

Note that if you find yourself up against the deadline and desperate to get the conversion completed before the end of the year, you could simply take a distribution from your traditional IRA, then roll it over to a Roth IRA within 60 days. This counts as a valid conversion, and would also count for 2023, even if the rollover doesn’t happen until early 2024. Since the distribution came out in 2023, it will be taxable for 2023. (Just be aware that, if the rollover does not occur until 2024, you will have to wait until 2025 to receive the corresponding Form 5498 showing the conversion.)

Net Unrealized Appreciation (NUA). NUA is a tax strategy that allows a person with company stock in their work plan – like a 401(k) – to pay long-term capital gains on the appreciation of the stock (as opposed to ordinary income tax if NUA was not pursued). However, we are already pushing the timing envelope here. Our advice is to never initiate an NUA transaction after Thanksgiving. There are just too many moving parts. Nevertheless, sometimes NUA requires a person to act. There are four triggers which open the door to the NUA strategy. If any of these triggers are “activated” (like, for example, by taking a distribution), then it is imperative to complete the NUA lump sum distribution before the end of the calendar year. If your NUA trigger has been activated, there is still time to get it done in 2023. But you must act quickly, or risk forfeiting the trigger. (Check with your plan administrator or financial advisor to see if you fall into this “must-move-now” NUA category.)

Qualified Charitable Distributions (QCDs). QCDs are a popular way to donate. IRA dollars are usually sent directly from the IRA to the charity. However, some IRA owners have checkbook IRAs, and therein lies a potential problem. When a check is written from a checkbook IRA account, the custodian will not recognize the distribution until the check is cashed. Checks written to a charity will qualify as a QCD, but the check must be cashed before the end of the year to qualify for 2023. For those writing checks to a favorite charity via their checkbook IRA, be sure to get a receipt AND make sure the check is cashed by 12/31.

Required Minimum Distributions (RMDs). Not much to say here. For those subject to an RMD, be sure to take it before the end of the year. Otherwise, the penalty can be severe.

Human nature often drives us to put things off until the last minute, but why wait? Whether a Roth conversion, NUA, QCD, RMD, or any other year-end item, best to just get it done. Like my dad used to say: “There’s no time like the present.”
https://www.irahelp.com/slottreport/still-time-left-do-list

FORMER BALTIMORE TOP PROSECUTOR CONVICTED OF LYING ON CORONAVIRUS WITHDRAWAL APPLICATION

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

Remember coronavirus-related distributions, or “CRDs”? Passed as part of the CARES Act in March 2020, CRDs were special distributions designed to help people who contracted COVID or had financial hardship caused by the pandemic. IRA owners or company plan participants who qualified as “affected individuals” could take CRDs of up to a total of $100,000 anytime during 2020.

There were three tax advantages to CRDs. First, if the person taking the CRD was under 59 ½, the 10% early distribution penalty was waived. Second, the federal income tax on the distribution could be spread over three years (2020-2022). Finally, the CRD could be repaid over a three-year period.

So why I am rehashing this unpleasant memory from the early days of the pandemic? Well, last week a federal court jury found that Baltimore’s ex-top prosecutor, Marilyn Mosby, lied on the application form when she requested two CRDs totaling $80,000 from the city’s 457(b) plan in 2020. She was convicted of two counts of perjury and faces up to 10 years of prison.

The plan’s CRD application required applicants to certify, under penalties of perjury, that they were adversely affected by COVID-19 (in other words, they were “affected individuals”). Mosby signed the application and certified she had suffered adverse financial consequences due to the virus.

At the trial, Mosby’s attorneys claimed she qualified because a travel business she opened while in office lost money due to COVID. But that defense was undermined by Mosby herself. Once word got out in 2020 that Mosby had started a side business while serving in elected office, she told a Baltimore online publication that her business actually had never gotten off the ground, had no clients or revenue, and wouldn’t really open until after she left office. (Mosby was voted out of office in 2022.) The prosecution argued that Mosby could not have claimed to have suffered adverse financial consequences as a result of a downturn in a travel business that she admitted had never even opened for business. Evidence was also introduced showing that Mosby’s annual salary went up in 2020 from $238,000 to $248,000.

The prosecution also established that Mosby had really taken the withdrawals to help with the purchase of two vacation properties in Florida. Her attorneys (correctly) pointed out that IRS guidance said that CRDs could be used for any purpose and didn’t have to be used to alleviate financial hardship. But it’s hard to believe the jury wasn’t offended by her use of the CRDs.

This is the only instance we have heard about of an individual being prosecuted for lying on a CRD application. The great irony is that this happened to a former prosecutor, who more than anybody, should have known what it means to certify a statement “under penalties of perjury.”

https://www.irahelp.com/slottreport/former-baltimore-top-prosecutor-convicted-lying-coronavirus-withdrawal-application

RMDS WHEN YOUR IRA INVESTMENTS ARE NOT LIQUID

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

You may have noticed grocery stores stocking up for Thanksgiving, and festive lights and displays going up everywhere. Yes, it is the holiday season, but it is also the season to take required minimum distributions (RMDs). One question we have been getting a lot this year involves RMDs when IRA investments are not liquid.

If you have a traditional IRA (or a SEP or SIMPLE IRA) and you are age 73 or older during 2023, you must take an RMD by December 31, 2023. The clock is ticking, and time is almost up. Many IRA custodians, in order to avoid last minute mistakes and allow enough time for processing, have deadlines even sooner. Missing the RMD deadline is serious business because there is a 25% penalty on any RMD amount that is not taken.

No Exceptions for Illiquid Assets

For most IRA investments, once the RMD calculation is done, processing the distribution is no big deal. A cash distribution or even a distribution of property can easily be done. But for some IRA investments it is not so simple. Some IRA assets, such as certain annuity products, hard-to-sell investments and real estate, may be difficult or almost impossible to liquidate. Distributing the RMD in shares of the investment may also be complicated or not possible. Despite these issues, there is no exception for illiquid assets to the RMD requirements. These requirements apply to all IRAs, regardless of the type of investment.

Possible Solutions

What if your IRA is entirely illiquid? There are some possible solutions. One of them is aggregation. The RMD rules allow you to aggregate your RMDs from your IRAs and take the total amount from any one account. If you have one IRA that is illiquid, you could simply take the RMD for that account from another IRA that is liquid. Remember, there are limits here. You cannot satisfy your RMD for your IRA from a workplace plan or a Roth IRA. Another possibility is to make a tax year IRA contribution if you are eligible to inject some cash into an IRA. The SECURE Act makes this possible by allowing IRA contributions at any age, but you would need to have earned income and you would be limited to the annual IRA contribution allowed. That may not be enough to satisfy the RMD.

Your options are limited, and the problem will not go away. Each year an RMD must be taken. While it is possible to get an IRA waiver of the 25% penalty, that can only be done after the missed RMD is taken. These issues are why it is a good idea to plan ahead if your IRA is invested in alternative investments. As you approach your required beginning date, be sure to keep enough liquid assets in your IRAs to satisfy your RMDs.

https://www.irahelp.com/slottreport/rmds-when-your-ira-investments-are-not-liquid

THE FIVE-YEAR RULE AND RMDS: TODAY’S SLOTT REPORT MAIBAG

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

Question:

In 2020 and 2021, when I was over 65 years old, I converted some of my IRA into a Roth IRA.  Does the five-year rule still apply to me, or can I now draw out all of the Roth IRA without any tax consequences? Also, I made the initial conversion in December of 2020, if the five-year rule does apply, do I need to wait until December 2025 to draw on it or can I draw on it anytime in 2025?

Thanks.

Howard

Answer:

Hi Howard,

This is an area where we get many questions. There are two five-year rules that apply to Roth IRA distributions.

The first five-year rule applies to converted funds. If you are under 59 1/2, and you take a distribution of converted funds within five years of the conversion, a 10% penalty will apply. This five-year rule does not apply in your case because you are over age 65.

However, there is a second five-year rule that applies when there is a distribution of earnings, and that does apply to you. If your first Roth conversion or contribution was for 2020, you must wait until January 1, 2025 before you can access your earnings from your Roth IRA tax-free.

Question:

I know you can delay taking your first required minimum distribution (RMD) until April 1 of the year after you turn 73. If you convert your entire IRA into a Roth before that date but after you turn 73, do you still have to take your first RMD distribution or is no distribution required as the entire IRA is converted prior to April 1 of the following year?

Best regards,

Tom

Answer:

Hi Tom,

If you convert in the year you reach age 73, you must take your RMD prior to the conversion. This is because you must take an RMD for that year, and the rules say that the RMD must be the first money distributed from the IRA. This is true even though the deadline for taking an RMD is April 1 of the following year.

https://www.irahelp.com/slottreport/five-year-rule-and-rmds-todays-slott-report-maibag

ONE BENEFICIARY, THREE IRAS, THREE DIFFERENT PAYOUT RULES

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

An advisor called and said his 75-year-old client had just passed away. He had questions about the payout rules applicable to the three IRAs the client left behind: a traditional IRA, a Roth IRA, and an inherited IRA from his sister. I asked who the beneficiaries were. When the advisor said everything had been left to “the estate,” I told him to hang on to his hat – the ride was about to get bumpy. We discussed the different IRAs, one at a time…

Inherited IRA. Since this was already an inherited IRA, and the estate was the next-in-line beneficiary, that made the estate a “successor” beneficiary. Under the SECURE Act, a successor beneficiary gets the 10-year rule. It does not matter who the successor is or if they could otherwise qualify as an eligible designated beneficiary (EDB). If the successor is a spouse or disabled or a minor child or, as was the case here, the estate, the successor gets the 10-year rule.

Additionally, under IRS proposed regulations, since RMDs (required minimum distributions) were being taken on the inherited IRA, the estate (as successor) must continue with those exact same payments, using the exact same single life expectancy factor (minus one each year) that the original beneficiary was using. The successor essentially “steps into the shoes” of the first beneficiary for RMD purposes in years 1 – 9, but has the added layer of also having to empty the account by the end of year 10. An estate-owned inherited IRA is established, and the 10-year rule is applied.

Traditional IRA. The 75-year-old gentleman died after his required beginning date (RBD – now generally April 1 of year after the year a person turns 73). Thus, he was taking lifetime RMDs from his traditional IRA. Since he died after his RBD with a non-designated beneficiary (“NDB” – or what I call a “non-person” beneficiary – his estate), the “ghost rule” applies. The ghost rule dictates the IRA is to be paid out over the single life expectancy of the deceased individual.

For the ghost rule, we use the client’s age in the year of death. (This is different than normal beneficiary age calculations where we use the beneficiary’s age in the year after the year of death.) As a 75-year-old, the corresponding single life expectancy factor is 14.8. Since RMDs from this second estate-owned inherited IRA would start in the year after the year of death, we subtract one and begin with a 13.8 factor next year, in 2024. This factor is then reduced by one in subsequent years. (Note the anomaly where the ghost rule, in this situation, has created a payout window that is longer than the 10-year period.)

Roth IRA. Roth IRAs do not have lifetime RMDs. Therefore, Roth IRA owners are always deemed to die before the required beginning date. This is true even if the Roth IRA owner is 100 – death is always before the RBD. For IRA owners who die before the RBD with a non-person (NDB) beneficiary, like an estate, the 5-year rule applies. There are no annual RMDs during the 5-year window. A third estate-owned inherited IRA is established, and the account must be emptied by the end of the fifth year after the year of death.

Owning a traditional IRA, Roth IRA and inherited IRA is commonplace. Naming your estate, while discouraged, is also not unusual. However, when we overlay the IRA payout rules applicable to each situation, things risk spinning out of control.

 

Owning a traditional IRA, Roth IRA and inherited IRA is commonplace. Naming your estate, while discouraged, is also not unusual. However, when we overlay the IRA payout rules applicable to each situation, things risk spinning out of control.

https://www.irahelp.com/slottreport/one-beneficiary-three-iras-three-different-payout-rules

SECURE 2.0’S BIGGEST MESS

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

 

Of the 92 provisions in the SECURE 2.0 legislation, signed into law last December, by far the most challenging is section 327.  Section 327 changes the distribution rules for spouse beneficiaries of IRA (and workplace plan) account holders and is effective January 1, 2024.

It’s hard to know exactly what Congress was trying to accomplish with section 327. Some commentators believe it was designed simply to create more favorable distribution rules when a surviving spouse inherits from a younger IRA owner.  Fair enough, but if that’s what Congress was trying to do, the drafters of the new law totally messed up. Congress should have simply layered the new rules for older spouse beneficiaries on top of the existing rules that would continue to apply for all other spouse beneficiaries. Instead, it completely removed the existing rules and substituted a brand new set of complicated rules that will apply to ALL spouse beneficiaries. The result is that some of these beneficiaries will actually be in a worse position than they are in under the current rules. That couldn’t have been what Congress intended.

Under the rules now in place, spouse beneficiaries generally have two options. One is to do a spousal rollover of the deceased owner’s IRA to the spouse’s own IRA. That usually isn’t recommended until age 59 ½ because the survivor will be subject to the 10% early distribution penalty if she taps into the funds before then. The second option is to remain an IRA beneficiary. That avoids the 10% penalty and allows RMDs (required minimum distributions) to be delayed until the deceased IRA owner would have reached his RMD required beginning date (generally, age 73). No election is required for this second option.

Starting next year, the spousal rollover is still on the table as the best option for spouse beneficiaries age 59 ½ or older. But things go off the rails for a spouse beneficiary who doesn’t want to do the rollover (because, for example, she’s younger than 59 ½ and worried about the 10% penalty). That person will have to make an actual election if she wants to have RMDs delayed until the deceased spouse would have been 73. Making that election will allow the spouse beneficiary to use the IRS Uniform Lifetime Table (rather than the Single Life Table) to calculate RMDs. That’s a good thing since it will result in lower RMDs. But, when RMDs start, the spouse beneficiary must apply that table by using not her own age, but the age the deceased owner would have reached had he lived. That’s also a good thing if the surviving spouse inherits from a younger IRA owner – not a common situation. It’s a bad thing if the spouse beneficiary inherits from an older owner – the more common situation.

The alternative for a surviving spouse younger than 59 ½ who remains a beneficiary is not to make the election. But not making the election means the spouse beneficiary must start taking RMDs the year after the IRA owner died (like non-spouse beneficiaries). Another bad outcome.

The bottom line is that, whether intended by Congress or not, section 327 is a mess that needs to be fixed. January 1, 2024 is right around the corner, and hardly anyone seems to be paying attention. It’s imperative that Congress (or the IRS) act as soon as possible.

https://www.irahelp.com/slottreport/secure-20%E2%80%99s-biggest-mess-0

THE PRO-RATA RULE AND MINOR IRA BENEFICIARIES: TODAY’S SLOTT REPORT MAILBAG

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

 

Question:

Dear Mr. Slott,

I made $40,000 additional non-deductible (after taxes) contributions to my IRA many years ago. I have filed IRS Form 8606 every year informing the IRS of the contributions. I would like to withdraw the $40,000 this year so that when I have to take my RMDs next year, the reporting to the IRS will be simpler.

Since these contributions were on an after-tax basis, how do I calculate the amount I owe to the IRS for any gains? And how do I report to the IRS that I am withdrawing the $40,000 non-deductible (after tax) contributions so I don’t have to pay taxes on this withdrawal?

Thank you,

Joey

Answer:

Assuming you also have pre-tax (or SEP or SIMPLE) IRA funds, you can’t just cherry pick your after-tax funds for withdrawal. Instead, the pro-rata rule will apply, and a portion of your withdrawal will be taxable. The 8606 for the year of withdrawal will apply the pro-rata rule to calculate your taxable portion. You will report on your tax return the total amount of your withdrawal (from the 1099-R provided by the IRA custodian) and the taxable portion (from the 8606).

Question:

If a minor (under 18) inherits a Roth IRA, when does the 10-year clock start for the Roth to be fully depleted?  At 18 or at the date they inherit?

Thanks,

Kevin

Answer:

A minor child of a Roth IRA owner could choose to be subject to the 10-year RMD (required minimum distribution) payment rule in the year she turns age 21. In that case, the remaining inherited IRA must be depleted by the last day of the 10th year following the year she turns 21. Until age 21, the child would take annual RMDs over her single life expectancy. And since RMDs were started, it appears the IRS would require those annual RMDs to continue within the 10-year period. Alternatively, the minor child could choose to have the 10-year rule period start immediately upon the parent’s death and not have annual RMDs in years 1 – 9.

https://www.irahelp.com/slottreport/pro-rata-rule-and-minor-ira-beneficiaries-today%E2%80%99s-slott-report-mailbag

IRA CONTRIBUTION LIMIT RAISED TO $7,000 FOR 2024

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

 

The IRS has released cost-of-living adjustments (COLAs) for 2024. Many IRA limits will increase next year.

Higher IRA Contributions

The limit on annual contributions to an IRA is increased to $7,000 for 2024, up from $6,500 in 2023. The IRA catch up contribution limit for individuals aged 50 and over was changed to now include a COLA under the SECURE 2.0 but remains $1,000 for 2024. This would allow an individual who is age 50 or older in 2024 to contribute $8.000 to an IRA.

New SECURE 2.0 COLAs

Some new additional COLAs for IRAs for 2024 made under SECURE 2.0 are as follows:

  • The limitation on contributions to qualifying longevity annuity contracts (QLACs) was raised by SECURE 2.0 to $200,000. For 2024, this limit remains $200,000.
  • For the first time qualified charitable distributions (QCDs) are indexed for inflation. For 2024, the QCD limit is increased to $105,000, up from $100,000 in 2023.
  • The limit for a one-time QCD from an IRA to a split-interest entity is increased to $53,000 for 2024, up from $50,000 for 2023.

Other IRA COLAs

The income ranges for determining eligibility to make deductible contributions to traditional IRAs, to contribute to Roth IRAs, and to claim the Saver’s Credit all increased for 2024.

The deduction for taxpayers making contributions to a traditional IRA is phased out for single individuals who are active participants in an employer plan and have adjusted gross incomes between $77,000 and $87,000, increased from between $73,000 and $83,000. For married couples filing jointly, if the spouse who makes the IRA contribution is an active participant, the income phase-out range is between $123,000 and $143,000, increased from between $116,000 and $136,000. For an individual who is not an active participant but is married to someone who is an active participant, the deduction is phased out if the couple’s income is between $230,000 and $240,000, increased from between $218,000 and $228,000.

The income phase-out range for individuals making contributions to a Roth IRA is increased to between $146,000 and $161,000 for single filers, up from between $138,000 and $153,000. For married couples filing jointly, the income phase-out range is increased to between $230,000 and $240,000, up from between $218,000 and $228,000.

The income limit for the Saver’s Credit is $76,500 for married couples filing jointly, up from $73,000; and $38,250 for singles and married individuals filing separately, up from $36,500.

The SEP contribution limit for 2024 is 25% of up to $345,000 of compensation, limited to a maximum annual contribution of $69,000.

The maximum SIMPLE IRA elective deferral is increased to $16,000 in 2024, up from $15,500 in 2023. The catch-up contribution limit for SIMPLE IRAs remains at $3,500.

More information on these and other COLAs for retirement accounts for 2024 can be found in Notice 2023-75.

https://www.irahelp.com/slottreport/ira-contribution-limit-raised-7000-2024

ROTH IRA DISTRIBUTION ORDERING RULES – KEEP IT SIMPLE

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

Within the 400-page Ed Slott advisor training manual, we include a basic chart that outlines the Roth IRA distribution ordering rules and the availability of those specific dollars. When presenting the material to a live audience, I always say it is my favorite page. Those in the crowd usually joke and ask incredulously, “You have a favorite page in this book?”

Yes. For such a simple graph, I think it will get a person through 95% of all Roth IRA distribution questions (and that percentage might be low). In fact, I keep the chart on my computer desktop and have shared it with so many people I lost count. The Slott Report format precludes me from sharing the actual chart, but I can share the words on it. Some key items I always mention during our training programs before discussing the chart:

  • Remember – the IRS views ALL of a person’s Roth IRAs as one big bucket of money. It does not matter how many Roth IRAs you maintain.
  • This is only applicable to Roth IRAs. These ordering rules do not consider any Roth dollars a person may have in a 401(k) nor does it factor in any inherited Roth IRAs.
  • Pay particular attention to the “OR” and “AND” words. These little words make a big difference as to availability of the Roth IRA funds.
  • When taking a distribution from a Roth IRA, this is the order in which the dollars come out, 1 through 3. You cannot access your converted dollars until the contributions have been depleted, and you cannot access any earnings until both the contributions and conversions are gone.

Keep it simple.

Drumroll…

And now, the words on my favorite chart…

Roth IRA Distribution Ordering Rules

1. Contributions. No tax. No penalty.

2. Conversions. No tax. No penalty if distributed after 5 years OR distributed after age 59 ½.

3. Earnings. No tax or penalty if distributed after 5 years AND 59 ½.

https://www.irahelp.com/slottreport/roth-ira-distribution-ordering-rules-%E2%80%93-keep-it-simple

COMMON CONFUSIONS WITH THE ONCE-PER-YEAR ROLLOVER RULE

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

The once-per-year IRA rollover rule sounds pretty easy to understand. You may only do one IRA-to-IRA (or Roth IRA-to-Roth IRA rollover) per year (365 days). However, this rule is often misunderstood.

One common confusion about the once-per-year rollover rule is whether multiple distributions or multiple deposits will trip you up.

Multiple Distributions on Different Days and One Rollover Deposit

If you can take a distribution on one day and roll it over on multiple different days and this is acceptable under the once-per-year rollover rule, is the opposite scenario also allowed? Can you take multiple distributions on different days and deposit them at one time as one rollover? The answer would be no. Even if all the distributions were taken from the same IRA, this would still not be allowed.

Example: Jimmy takes a $2,000 distribution from his IRA on December 1 and another $30,000 distribution on December 12. His plan is to roll over both on the same day to a new IRA. Unfortunately for Jimmy, only one of his IRA distributions is eligible for rollover. This is because the once-per year rule limits him to rolling over only one distribution within a 365-day period.

One Distribution and Multiple Rollover Deposits

If you take one distribution from your IRA, you may split the funds and roll them over to multiple IRAs. The rollovers could be done on different days and that would not be a problem. This works for purposes of the once-per-year rollover rule because only one distribution is received even though there is more than one rollover deposit.

Example: Annie receives a $90,000 distribution from her IRA on November 15. On November 20, Annie rolls over $75,000 to her IRA. On November 25, she decides to roll over the remaining $15,000 to another IRA. This is not a violation of the once-per year rollover rule because Annie received only one distribution even though she did two rollovers on two different dates.

Do Direct Transfers

The cost of misunderstanding the once-per-year rollover rule can be high. Distributions that are not eligible for rollover will most likely be fully taxable. An attempt to roll over these distributions will result in an excess contribution with possible penalties.

The best advice is to avoid 60-day rollovers and the complications of the once-per-year rollover rule. You can do this by moving your IRA funds as trustee-to-trustee transfers instead. With a transfer, the funds go directly from one IRA custodian to another. Transfers are not subject to the once-per year rule so you can move your IRA funds this way as many times as you like during the same year.

https://www.irahelp.com/slottreport/common-confusions-once-year-rollover-rule

THE BACK-DOOR ROTH STRATEGY AND SPOUSAL BENEFICIARIES: TODAY’S SLOTT REPORT MAILBAG

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

Question:

I earn too much money and can’t do a Roth IRA. I have heard about the back-door Roth IRA strategy for those who earn more than the allowable contribution for the Roth IRA where they contribute to a traditional IRA and then roll over to a Roth IRA. Can this “back-door” analysis be used for the sole proprietor with no employees by contributing to a SEP IRA and then converting to a Roth IRA?

Answer:

The back-door Roth IRA strategy is often used by those who have incomes too high to contribute directly to a Roth IRA. With this strategy, a contribution, usually nondeductible, would be made to a traditional IRA and then converted to a Roth IRA. Unlike Roth IRAs, traditional IRAs have no income limits for making contributions.

The same strategy could be done with a SEP IRA contribution by a sole proprietor. The SEP contribution could be made and then converted to a Roth IRA. The individual would need to pay taxes on the converted funds.

Question:

My spouse died last month, and she had a Roth IRA. I have read that I can combine it with my own Roth IRA. Could my credit union do a regular distribution and then roll the money over into my Roth IRA?

Answer:

Our condolences on the death of your spouse. As a spouse beneficiary, you can do a spousal rollover and combine her Roth IRA funds with yours. This transaction can be done in a couple of different ways. While a 60-day rollover would be possible, it would likely be easier to have your credit union assist you in doing a direct transfer from the Roth IRA you inherited from your wife to your own Roth IRA.

https://www.irahelp.com/slottreport/back-door-roth-strategy-and-spousal-beneficiaries-todays-slott-report-mailbag

“ESTATE BYPASS” – SPOUSAL ROLLOVER WHEN THE ESTATE IS BENEFICIARY

By Andy Ives, CFP®, AIF®
IRA Analyst
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@theslottreport

An estate can become the beneficiary of a person’s IRA in a couple of ways. First, the estate could be named outright as the beneficiary on the beneficiary form. This is not recommended. Why? One reason is that a non-designated beneficiary (like an estate), must follow certain restrictive payout rules. For example, if an IRA owner names his estate as beneficiary and then dies prior to his required beginning date (April 1 of the year after the year he turns 73), the estate is subject to the 5-year payout rule. There are no annual RMDs during this 5-year period, but the entire account must be depleted by the end of this compressed window. Had a living, breathing, non-eligible designated beneficiary been named, that person would have twice as long to empty the account (and spread the taxes due) using the 10-year rule.

Another way an estate can become the beneficiary of an IRA is if no beneficiary is named at all. If no beneficiary form is on file with the custodian, and if no form can be produced by the family, we are forced to look to the default beneficiary as dictated by the custodian. Oftentimes this is the estate. As such, an estate-owned inherited IRA is opened, and we follow the non-designated beneficiary payout rules. Any distributions from the estate-owned inherited IRA are paid into an estate account and are then distributed (and taxed) to the estate beneficiaries.

Recently, an advisor contacted me with just such a scenario. The beneficiary form slipped through the cracks on one of his client’s IRAs. Unfortunately, the client passed away before the oversight was identified. Even though all the client’s other accounts named his surviving spouse as primary beneficiary, this IRA was stuck using the custodian’s default beneficiary – his estate.

What to do? Is there any recourse that would allow the surviving spouse to simply do a spousal rollover of the IRA assets into her own name? All was not lost. I asked the advisor if the spouse was the sole beneficiary of the estate. If she was, there is historical precedent for allowing a spousal rollover. What historical precedent? Private letter rulings, or “PLRs.” PLRs are IRS decisions specific to a particular scenario. Technically, PLRs can only be relied upon by the person who requested the ruling. But if enough PLRs reach the same conclusion on similar situations, a trend is established. In fact, allowing a spousal rollover when the estate is named as the IRA beneficiary (and the spouse is the sole estate beneficiary) is one such PLR trend.

Each of the following PLRs permitted a spousal rollover when either a workplace retirement plan or an IRA named the estate as the beneficiary: PLR 201430020, PLR 201430027, PLR 201821008, PLR 201839005. In fact, another PLR – 200343030 – was the first ruling that allowed non-spouse beneficiaries to establish their own inherited IRAs when the estate was named. However, while inherited IRAs were permitted and the estate could be closed, the non-spouse beneficiaries were still bound by the payout rules applicable to the estate.

Be aware that these PLRs are not a “get-out-of-jail-free” card. The custodian must allow the transaction to take place, and there are no guarantees they will. (Anecdotally, I know of one custodian who has an internal process for such transactions, and they call it an “estate bypass.”) Of course, this whole estate-as-beneficiary, please-let-me-do-a-spousal-rollover mess can be avoided if you diligently check…and update…all beneficiary forms.

https://www.irahelp.com/slottreport/%E2%80%9Cestate-bypass%E2%80%9D-spousal-rollover-when-estate-beneficiary

IRA MID-TERM EXAM

By Ian Berger, JD
IRA Analyst
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@theslottreport

The Investment Company Institute (ICI) is an association representing mutual fund companies and similar investment companies. Each year, ICI conducts a survey of the prevalence of IRAs in American households. Recently, the ICI issued its 2023 survey based on data from mid-2022 and calendar year 2021. The full report is available at The Role of IRAs in US Households’ Saving for Retirement, 2022 (ici.org) .

Based on the survey results, here are some interesting questions (with answers at the bottom of the article):

1. What were the total assets held in IRAs, including traditional and Roth IRAs, SEP IRAs and SIMPLE IRAs (as of mid-2022)?

A.  $1.7 billion

B.  $11.7 billion

C.  $1.7 trillion

D.  $11.7 trillion

2. What percentage of all U.S. retirement assets were held in IRAs (as of mid-2022)?

A.  24%

B.  34%

C.  44%

D.  54%

3. What percentage of U.S. households held any IRAs, including traditional and Roth IRAs, SEP IRAs and SIMPLE IRAs (as of mid-2022)?

A.  22%

B.  32%

C.  42%

D.  52%

4. True or False. 64% of households with incomes of $100,000 or more owned IRAs (as of mid-2022).

5. What percentage of U.S. households owned Roth IRAs (as of mid-2022)?

A.  25%

B.  35%

C.  45%

D.  55%

6. What percentage of U.S. households included someone who made an IRA contribution for 2021?

A. 15%

B.  25%

C.  35%

D.  45%

7. What percentage of an average household’s financial assets consisted of IRA funds (as of mid-2022)?

A.  6%

B.  11%

C.  21%

D.  31%

8. True or False. 40% of traditional IRA accounts contained rollovers from employer-sponsored retirement plans (as of mid-2022).

9. What percentage of traditional IRA owners who did rollovers from company plans said they consulted with a financial advisor before doing the rollover?

A.   33%

B.   43%

C.   53%

D.   63%

10. True or False. The most cited reason for doing a rollover from a company plan to an IRA was not wanting to leave the assets with the former employer.

Answers:

1.  D                                                         6.  A

2.  B                                                         7.  B

3.  C                                                         8.  False (60%)

4.  True                                                    9.  D

5.  A                                                        10. True

https://www.irahelp.com/slottreport/ira-mid-term-exam

THE STILL-WORKING EXCEPTION AND SPOUSAL ROLLOVERS: TODAY’S SLOTT REPORT MAILBAG

By Sarah Brenner, JD
Director of Retirement Education
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@theslottreport

Question:

I have a client who just retired at age 80.  He has $800,000 in his 401(k) plan which is being rolled over to an IRA.  Does he have to take an RMD this year based on the December 31, 2022 401(k) account value, and can he defer that to early 2024?

Thank you!

John

Answer:

Hi John,

The still-working exception (assuming the plan has this optional design feature) allows participants in a workplace plan to delay taking RMDs until retirement. The first RMD would be due April 1 of the year following the year of retirement. So, if your client retired in 2023, his first RMD would not need to be taken until April 1, 2024. He would also need to take an RMD for 2024 by December 31, 2024.

If he decides to roll over his plan to an IRA this year, that will have an impact on when RMDs must be taken. The rules require that the RMD for the year be taken before any rollover to an IRA can happen. So, he would need to take his first RMD in 2023 before the rollover could be done. He would then have to take an RMD from the IRA for 2024 by December 31, 2024.

Question:

I have a client that was born in 1951 and died in 2021 at the age of 70.  The spouse beneficiary, currently age 66, did not make an election by the December 31st of the year following his death. The assets still remain in his name.  Can we move them into the spouse’s name and, based on her age, continue to avoid the RMD?  Is there a penalty for not making the election by December 31st of the year following the year of the owner’s death?

Toni

Answer:

Hi Toni,

The rules do not require that a spousal rollover be done by December 31 of the year following the year of death. A spousal rollover can be done later. There is no reason why the surviving spouse cannot do a spousal rollover now and delay RMDs until she reaches age 73.

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

HOW TO LOSE AN INHERITED IRA AND GAIN A BIG TAX BILL

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

 

Did you inherit an IRA from someone who is NOT your spouse? This is not uncommon. Maybe you inherited from a sibling or a parent or a friend. If this is your situation, proceed with caution! For non-spouse beneficiaries, a wrong move can result in disastrous consequences. So, take your time and do it right.

Your first step is to contact the IRA custodian to be sure that the account is properly titled as an inherited IRA. Next, carefully explore your options. What are a nonspouse beneficiary’s options when it comes to the inherited IRA?

In the wake of the SECURE Act, most non-spouse beneficiaries can no longer take advantage of the “stretch” IRA. Only eligible designated beneficiaries (EDBs) have this option. Nonspouse EDBs include disabled and chronically ill individuals as well as minor children of the IRA owner and beneficiaries who are not more than 10 years younger than the IRA owner. However, nonspouse beneficiaries who are not EDBs are not forced to take a lump sum distribution. Instead, most nonspouse beneficiaries will be able to spread distributions from an inherited IRA over a 10-year payout period. Annual RMDs may be required during the 10-year payout period if the original IRA owner died on or after their required beginning date. The IRS has waived these payments within the 10-year period for years 2021, 2022, and 2023 due to continued confusion over the rules.

When you inherit an IRA as a non-spouse, you should proceed with extra caution. “Touch nothing!” is good advice. Be aware of all your options and give serious thought to what you want before doing anything. A nonspouse beneficiary who takes a distribution without understanding the tax consequences has no remedy. A nonspouse beneficiary, unlike a spouse beneficiary, does not have the option of rolling over an unwanted distribution. Nonspouse beneficiaries do have the ability to move an inherited IRA to a new custodian, but the move must be done by a direct trustee-to-trustee transfer.

Example: Ben died in 2023 at age 65. He named his two daughters as beneficiaries of his IRA. Daughter Gail consults with a financial advisor and sets up an inherited IRA. She does not take an immediate distribution from this IRA. There is no taxable event. Instead, Gail must empty the inherited IRA account by December 31, 2033. Gail’s advisor sets up a strategy for taking distributions from the inherited IRA over the next ten years, taking into account the rest of Gail’s expected income each year to maximize tax savings.

Daughter Nicole does not consult with an expert and takes a lump sum distribution from her inherited IRA. Nicole will be faced with an immediate large tax bill, reducing her inheritance. There is no remedy for Nicole if she has second thoughts. The distribution cannot be rolled over. Nicole has lost her inherited IRA and gained a tax bill.

https://www.irahelp.com/slottreport/how-lose-inherited-ira-and-gain-big-tax-bill

“WHERE DOES IT SAY THAT?” – THE PROBLEM WITH LEGALESE

By Andy Ives, CFP®, AIF®
IRA Analyst
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@theslottreport
My biggest gripe with legislation is the same complaint held by most – the bulk of it is written in legalese – i.e., difficult-to-understand language. I am no idiot, but sometimes I sure feel dumb when I read things like the SECURE Act. My eyes glaze over and I ask myself, “What the heck did I just read?” While I proudly carry the CFP® designation and have over 25 years of experience in the financial services industry, I have no formal legal training. Thankfully, I work with a couple of experienced attorneys who can recuse me if I flounder.

I understand that financial advisors are on the front lines, speaking directly with clients. I also understand that advisors must earn and retain their client’s confidence. A string of poor guidance or incorrect answers can end a relationship quickly. We are all trying to make sense of the newest IRA rules. So, as advisor questions come in about the SECURE Act, SECURE 2.0 and the tax code, I get it when they ask, “Where does it say that?” Advisors want to present concrete evidence as to why a decision is being made or what rules apply in tricky situations.

But the “Where does it say that?” question is not an easy one. Here is a prime example…

If a person makes an excess contribution to their IRA, it must be corrected. (Examples of excess IRA contributions include contributions that exceed the maximum annual contribution dollar limit for the year, and rolling over an amount that isn’t eligible for rollover – like a required minimum distribution.) However, an excess contribution may not be fixed by simply removing the amount of the excess. The excess, plus or minus the earnings (what the IRS calls the “net income attributable,” or “NIA”) must be removed by October 15th of the year after the year for which the contribution was made. If the excess is not timely corrected by the October 15 deadline, then the 6% penalty applies each year the amount remains in the account as of December 31. After the October 15 deadline, only the excess amount needs to be withdrawn.

Prior to SECURE 2.0, if a person under age 59 ½ made an excess contribution fix before the October deadline, the earnings (the NIA) was taxable AND subject to a 10% penalty. This 10% penalty on the NIA was eliminated by SECURE 2.0. But where does it say that in the law?

SEC. 333. ELIMINATION OF ADDITIONAL TAX ON CORRECTIVE DISTRIBUTIONS OF EXCESS CONTRIBUTIONS.

(a) IN GENERAL.—Subparagraph (A) of section 72(t)(2) is amended –

     (1) by striking ‘‘or’’ at the end of clause (vii);

     (2) by striking the period at the end of clause (viii) and inserting ‘‘, or’’; and

     (3) by inserting after clause (viii) the following new clause:

          ‘‘(ix) attributable to withdrawal of net income attributable to a contribution which is distributed pursuant to section    408(d)(4).’’

Minus the effective date clause, this is the entire section – hidden within the 340+ pages of SECURE 2.0 – eliminating the 10% penalty on NIA. Clear as mud? You can read it again – but it probably won’t help. Only by overlaying Section 333 from SECURE 2.0 onto the tax code can one deduce what is happening. So, if you ask me, “Where does it say that?” – I have a hunch what tangled mess lies ahead. Please forgive me if I hesitate and squirm and hem and haw.

https://www.irahelp.com/slottreport/%E2%80%9Cwhere-does-it-say-that%E2%80%9D-%E2%80%93-problem-legalese

NON-SPOUSE BENEFICIARIES AND ROTH IRA DISTRIBUTIONS: TODAY’S SLOTT REPORT MAILBAG

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

QUESTION:

On September 6th in a piece titled, “Rules for Inherited IRAs that May Surprise Nonspouse Beneficiaries,” Sarah Brenner from Ed Slott and Company wrote, “If you inherited the IRA funds in 2020 or later, as a nonspouse beneficiary you will most likely be subject to a 10-year payout-period, possibly with annual RMDs during the 10-year period.”

My brothers and sisters and I are non-spousal beneficiaries, and my understanding is that there is no rule or code yet that states we must take some out of the inherited IRA account each year, only that it must be drained by end of the tenth year as required by the SECURE Act. My sibling says we must take some each year. Which of us is correct? We are all under the RMD age, in our sixties and our parents passed September of 2022.

With thanks,

Jim

ANSWER:

Jim,

On February 23, 2022, the IRS issued proposed regulations, taking the position that when death occurs on or after the required beginning date (RBD), a non-eligible designated beneficiary (like you and your siblings) must take annual required minimum distributions (RMDs) AND empty the account under the 10-year rule. (The rule requiring annual RMDs when an account owner dies on or after her RBD is sometimes called the “at least as rapidly” rule.) The IRS’s interpretation of the SECURE Act is still being debated. In fact, while this discussion continues, IRS Notice 2022-53 and Notice 2023-54 waived penalties for missed 2021, 2022 and 2023 RMDs within the 10-year period. While we wait for the final regulations (which could take many years to finalize) we follow the proposed regulations which require RMDs within the 10-year period for certain beneficiaries.

QUESTION:

My wife wants to contribute from her compensation from her job to a Roth IRA. Does she have to wait five years to touch her contributions, or can she access them whenever, if necessary? I’m not talking about the earnings in the Roth IRA, only the contributions.

Dave

ANSWER:

Dave,

Based on strict Roth IRA distribution ordering rules, contributions come out first, then Roth conversions, then earnings. These ordering rules apply across all of a person’s Roth IRAs, regardless of how many exist or where they are held. Be aware that the IRS views all of a person’s Roth IRAs as one large bucket of money. (It does not matter if the individual thinks of their accounts as “my contributory Roth” and “my converted Roth.”) Within that combined Roth IRA bucket, the owner always has access to their Roth IRA contributions tax- and penalty-free, regardless of age.

https://www.irahelp.com/slottreport/non-spouse-beneficiaries-and-roth-ira-distributions-todays-slott-report-mailbag

WHY I TURNED DOWN MY FORMER EMPLOYER’S LUMP SUM BUYOUT OFFER

By Ian Berger, JD
IRA Analyst
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@theslottreport

Earlier in my career, I worked for a company that sponsored a defined benefit (DB) pension plan. Up to now, I’ve chosen to defer payments from the plan. A few weeks ago, I received an official-looking package in the mail containing the news that I qualified for a lump sum buyout. A lump sum buyout is a limited opportunity for former DB plan participants to elect a one-time cash payment in exchange for giving up future periodic payments.

Deciding whether to accept a lump sum buyout is an important choice that shouldn’t be made without consulting with a knowledgeable financial advisor. Here are several factors that should be considered:

What is the effect of interest rates?

The lump sum amount is calculated by taking into account several factors, including an assumption about interest rates. The lower the interest rate assumption, the higher the lump sum. Not surprisingly, interest rates used by plans to calculate lump sums have been rising fast and are now as high as they’ve been since 2008.

How is your health?

The amount of the lump sum is also based on average life expectancies. If you expect to live longer than an average person of your age, you may want to consider passing up the lump sum. However, if you are facing medical issues, taking the buyout offer may be the way to go.

How financially secure is your employer and your plan?

If your employer goes out of business with a pension plan that doesn’t have enough funds to pay benefits, your existing or future payments could be reduced. That would be a factor favoring a buyout. The Pension Benefit Guaranty Corporation (PBGC) does insure pension benefits up to a certain amount. However, even though the PBGC’s financial picture has improved somewhat, it might be risky to count on that lifeline.

Will your spouse agree?

If you are married, your spouse must consent before you can receive a lump sum.

How tempting will a lump sum be?

Be honest with yourself. You may be the type of person who wouldn’t be able to resist spending a large check instead of putting it away for retirement. If you are, taking a lump sum now may jeopardize your financial well-being in later years.

Know the tax rules

DB monthly payments are typically fully taxable in the year received, and you can’t roll them over. But a lump sum payment is eligible for rollover to an IRA. Once rolled over, your funds become subject to required minimum distribution (RMD) rules. But aside from that, you have lots of flexibility with IRA withdrawals.

The Verdict

The relatively high level of current interest rates, the good health of my wife (my beneficiary) and me, and the solid financial shape of my former employer all led me to turn down the lump sum buyout. But believing this was the right move didn’t make it any easier to pass up the largest check I’ll ever see.

https://www.irahelp.com/slottreport/why-i-turned-down-my-former-employer%E2%80%99s-lump-sum-buyout-offer

SECURE 2.0 ALLOWS QCDS TO CGAS

By Sarah Brenner, JD
Director of Retirement Education
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@theslottreport

SECURE 2.0 expands qualified charitable distributions (QCDs) by allowing a one-time only QCD of up to $50,000 to a split-interest entity. As a result of this new rule, there is now a great opportunity to fund a charitable gift annuity (CGA) with a QCD.

QCD Rules

To understand the new SECURE 2.0 provision allowing QCDs to split-interest entities, it is helpful to review the rules for QCDs generally, since these rules will still apply. Here are the basics:

  • QCDs are only available to IRA owners or beneficiaries age 70½ and over and is capped at $100,000 (indexed for inflation) per person, per year. A QCD to a split-interest entity is capped at $50,000.
  • QCDs are only available from IRAs, Roth IRAs and INACTIVE SEP and SIMPLE IRAs. A QCD cannot be done from any employer plans.
  • Gifts made to private grant making foundations or donor-advised funds do not qualify.
  • The funds must be directly transferred from the IRA to the charity.
  • The charitable donation from an IRA can satisfy a required minimum distribution (RMD), but the IRA distribution is not includable in income.
  • No deduction can be taken for the charitable contribution.
  • For a married couple where each spouse has their own IRAs, each spouse can contribute up to $100,000 (as indexed) from their own IRAs.
  • If more than $100,000 (as indexed) is withdrawn from the IRA and contributed to a charity, there is no carryover to a future year. The excess is taxable income, and a charitable deduction can be claimed if the taxpayer itemizes.
  • The contribution to the charity would have had to be entirely deductible if it were not made from an IRA. There can be no benefit back to the taxpayer. (There is a limited exception for the new rule allowing QCDs to split-interest entities.)
  • The distribution from the IRA to a charity can satisfy an outstanding pledge to the charity without causing a prohibited transaction.
  • The charitable substantiation requirements apply. The donor must receive a CWA (contemporaneous written acknowledgment) from the charity (i.e., a receipt).
  • QCDs apply only to taxable amounts. This is an exception to the pro-rata rule.

New Rules for QCDs to Split-Interest Entities

Prior to SECURE 2.0, QCDs could only be made to charities. They were not allowed to be made to split-interest entities. A split interest entity is a legal entity that allows a donor to receive a benefit during her lifetime or for a set term, with the remainder (anything left) benefiting a charity after the donor’s death.

Qualifying split interest entities include:

  • A charitable remainder annuity trust (CRAT);
  • A charitable remainder unitrust (CRUT); or
  • A charitable gift annuity (CGA). To qualify the annuity must start fixed payments of 5% or greater not later than one year from the date of funding.

There are some significant limitations. A QCD to a split-interest entity can only be done once in a lifetime and is limited to $50,000 (as indexed for inflation). The split-interest entity can only be funded with QCDs — and no other funds.

A CRAT or CRUT is probably not a good candidate for a QCD. It is unlikely that it would be worth the cost and work to establish a new trust just for a $50,000 QCD. These trusts are expensive to set up and administer. However, using a QCD to fund a CGA is a strategy that may be attractive to many IRA owners. A good number of charities already offer charitable gift annuities. Now these can be funded with a QCD.

https://www.irahelp.com/slottreport/secure-20-allows-qcds-cgas

TOP 10 IRA “POPULAR CONFUSIONS”

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

The Ed Slott team answers thousands of IRA and work plan questions annually – emails, phone calls, in-person conversations, webinars, Q&A programs and texts. We accommodate all members of the Ed Slott Elite Advisor Group, work with non-member advisors at our 2-Day training programs, and answer questions from the general public via our weekly mailbag. Over time, certain inquiries repeat themselves. I call these “popular confusions.” Here are 10 IRA and work plan topics that you may have stumbled across yourself:

10. QCDs (Qualified Charitable Distributions). You can do a QCD for more than the RMD (required minimum distribution) for that year, but you can’t take a distribution and then retroactively “deem” it to be a QCD. Also, if you already took your RMD, you can still do a QCD. It is just an additional distribution over and above what you already took.

9. Participation in multiple work plans – like a 401(k) and a SIMPLE. Yes, you can max out multiple work plans if you work at different companies, but you are bound by the annual elective deferral limits, aggregated across all plans.

8. Phase-out rules for IRA deductibility. Even if you make a million-dollar salary, you can still potentially deduct an IRA contribution. It depends if you are “covered” by a work plan or not.

7. Rolling a Roth 401(k) into a Roth IRA. So many variables. How old are you? How long have you had the Roth 401(k)? Do you have a Roth IRA? When was that Roth IRA started?

6. Inherited Roth IRAs – Do annual RMDs apply or not? An eligible designated beneficiary (EDB) can take stretch RMD payments from an inherited Roth IRA. However, a non-EDB of a Roth IRA will NOT have RMDs within the 10-year rule.

5. Pro-rata rule/Backdoor Roth. Holy cow, does this confuse people! You cannot cherry-pick just the after-tax dollars in your IRA and only convert those. The IRS looks at all your IRAs, SEPs and SIMPLE plans as one big bucket of money. The ratio of after-tax vs. pre-tax determines the taxability of the conversion…and you are not paying “double tax.”

4. The “Not-more-than-10-years-younger” EDB category. This group is often completely overlooked. Anyone in the world who is not more than 10 years younger than you qualifies as an EDB on your IRA. There does not need to be any family relationship.

3. Roth IRA distribution ordering rules. Contributions come out first, converted dollars come out second, earnings come out last. End of story. There is no FIFO, LIFO, or fe-fi-fo-fum.

2. Rules when a trust or estate is named as IRA beneficiary. Where to begin? The trust or estate is the IRA beneficiary. You do not get to automatically set up inherited IRAs for the trust or estate beneficiaries – although the custodian may allow it based on previous private letter rulings. (And I am afraid to even mention the possibility of the “ghost rule” payout!)

And the number one most popular confusion…

1. Roth 5-year clocks. We could host a half-day webinar on this topic alone. There are two Roth IRA 5-year clocks to consider, and the nuances of different payout situations are infinite.

https://www.irahelp.com/slottreport/top-10-ira-%E2%80%9Cpopular-confusions%E2%80%9D

RMD RULES FOR INHERITED IRAS AND 401(K) DISTRIBUTIONS: TODAY’S SLOTT REPORT MAILBAG

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

Question:

I have a new inherited IRA, and I believe that I am subject to BOTH the 10-year rule and to annual RMDs. Is this true?

 

My situation:

 

 

  •  Original owner was age 92 and passed in September 2022.
  • Original owner was taking RMDs and took the 2022 RMD in February 2022.
  • My brother and I (age 61 and 63) each inherited half of this IRA; the paperwork on this inheritance was not complete until late January 2023. We are non-spouse beneficiaries (sons).

 

How do we calculate the RMDs we need to take, if any? (What balance do we use? Balance dated when? Whose age/life expectancy do we use?) When does the 10-year-rule clock start for us?

 

 

 

Thanks,

 

 

Mark

Answer:

Hi Mark,

You are correct. Each of the inherited IRAs is subject to both the 10-year payment rule and annual RMDs. (I assume the inherited IRA has been split into separate accounts. If not, that should be done by 12/31/23.) Since death was in 2022, the 10-year period begins in 2023 and the inherited IRAs must be emptied by 12/31/32. Annual RMDs originally would have been required starting in 2023, but the IRS has waived 2023 RMDs for beneficiaries in your situation.

If RMDs are required for 2024 (depending on future IRS guidance), they would be based on the 12/31/23 account balances. If you turn (or turned) 63 this year, your 2024 RMD would use a 23.5 life expectancy factor under the IRS Single Life Table (24.5, the factor for a 63-year old that you would have used for the 2023 RMD, minus 1), the 2025 RMD would be based on a 22.5 factor (23.5 minus 1), and so forth. Your brother’s 2024 RMD (assuming he turns or turned 61 this year) would be based on a 25.2 life expectancy factor (26.2, the factor for a 61-year old that he would have used for the 2023 RMD, minus 1).

Question:

I have a client who is 76 years old, still works and does not have an ownership interest in her employer. She therefore has not been taking RMDs from her 401(k).  She rolled over a portion of her 401(k) to her traditional IRA this year and continues to work for this company.  She does not intend to retire until next year or later. She will continue to take RMDs on her IRA based on the prior year end balance.

Is there any RMD this year relative to the partial rollover from her 401(k)?

Answer:

No. Her 2023 IRA RMD will be based on the 12/31/22 IRA balance, which does not include the amount rolled over earlier this year. And, she does not have a 2023 RMD due from the 401(k) since she is still working for her employer.

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

BEWARE OF INVESTING IRAS IN NFTS

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

If you are thinking of buying an NFT (non-fungible token) with your IRA funds, you may want to reconsider. In Notice 2023-27, the IRS said that NFTs associated with “collectibles” are prohibited IRA investments. This could expose you to significant taxes and penalties.

IRAs are subject to strict prohibited transaction rules to ensure that an IRA owner (or related party) does not engage in self-dealing. But only a few IRA investments are prohibited: collectibles, life insurance and S-corporation stock.

So, what is a collectible? Under the tax code, it includes:

  • Any work of art;
  • Any rug or antique;
  • Any metal or gem;
  • Any stamp or coin (except for certain gold coins or silver coins minted by the Treasury Department, as well as certain bullion);
  • Any alcoholic beverage; or
  • Any other tangible personal property specified by the IRS.

Notice 2023-27 says that an NFT is itself a collectible if it is associated with any of these prohibited collectibles. This would occur if the NFT either gives the NFT holder a right to a prohibited collectible or certifies ownership of a prohibited collectible.

If an NFT is considered a collectible, then an IRA investment in the NFT is prohibited and would result in a “deemed distribution” to you in the year of your investment. (It’s called a “deemed distribution” because you don’t have to withdraw the collectible from the IRA when the distribution on the investment occurs.) The amount of the distribution is the original cost of the collectible.

If you are investing a traditional IRA in a collectible, all or part of the deemed distribution may be taxable. And if you are under age 59 ½, you may also be subject to a 10% early distribution penalty.

By contrast, if you’re investing a Roth IRA in a collectible, the deemed distribution would not be taxable if the distribution is “qualified.” To be qualified, the investment must have been made after any of your Roth IRAs has been held for at least five years and when you are at least age 59 ½. If the distribution is not qualified, the Roth IRA ordering rules apply, and all or part of the distribution may be taxed to you.

So, think carefully before making any new IRA investments in an NFT that is associated with a prohibited collectible. But what if you already have that type of investment in your IRA? Any IRA investment in NFTs made before 2020 would probably be OK since any IRS issues would be barred by the usual three-year IRS statute of limitations. However, it’s not clear whether the IRS will retroactively go after investments made after 2019 but before March 21, 2023 (the date Notice 2023-27 was issued). If you are in that boat, by all means see a CPA or tax attorney for advice.

https://www.irahelp.com/slottreport/beware-investing-iras-nfts

THE 10-YEAR RULE AND SPOUSAL BENEFICIARIES: TODAY’S SLOTT REPORT MAILBAG

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

Question:

I understand that my kids will need to empty my Roth IRA in 10 years, but do they need to take RMDs in years 1 through 9? I am beyond my RMD age.

Larry

Answer:

Larry,

Assuming none of your children can qualify as an eligible designated beneficiary (disabled or chronically ill), then they will have to abide by the 10-year rule. However, even though you are beyond your required beginning date (RBD) for taking lifetime RMDs, we know that RMDs do not apply to Roth IRA owners. As such, all Roth IRA owners are deemed to die before their RBD. Since RMDs were not “turned on” by you during your lifetime, then RMDs will not apply within the 10-year rule for your children. They can let the inherited Roth IRA grow tax-free and untouched for a decade.

Question:

I’m a fan of your Monthly IRA Update; thank you for your helpful explanations of the changes to IRA rules. I have a question I hope you can help clarify: I read in your recent article “Anomalies and Exceptions” (8/9/23) that when a traditional IRA owner dies and his IRA is passed to a beneficiary, that beneficiary must maintain the account as an inherited IRA. The inherited account cannot then be converted to an inherited Roth IRA. No direct conversions are allowed.

So, here’s my question…if a surviving spouse did a spousal rollover of the deceased spouse’s traditional IRA into his/her own traditional IRA, could the surviving spouse then do a direct conversion to his/her own Roth IRA? Would that direct conversion be allowed? Would it matter if the deceased spouse was already taking RMDs from his/her traditional IRA?

Thank you,

Margo

Answer:

Margo,

Spouse beneficiaries have a number of benefits available to them that non-spouse IRA beneficiaries do not. You mentioned a spousal rollover. A spouse beneficiary is allowed to transfer a deceased spouse’s IRA into her own IRA. After the spousal rollover, the assets are treated as if they always belonged to the surviving spouse. So, if a spouse beneficiary did a spousal rollover of a deceased spouse’s traditional IRA into her own IRA, yes, that surviving spouse could then convert those dollars to a Roth IRA. If the deceased spouse was taking RMDs, just be sure the year-of-death RMD is taken before any Roth conversion is done.

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

“MID-AIR” ROTH CONVERSIONS

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

If ever I was traveling from Los Angeles to Atlanta, I would choose a direct flight with no layovers. I want the most efficient route to my destination. Point A to Point B. Take off, land. Assuming no difference in ticket price and all things being equal, if another LAX to ATL itinerary included a stop in, say, Chicago, would there be any reason to take it? Why pass through another airport in another city when I can fly direct? If I have no personal or professional business in Chicago, it makes no sense for me to go there. A layover in Chicago does nothing but add time, introduce possible delays, and create the risk of a missed connection.

Rollovers from work plans like a 401(k) to an IRA are as common as air travel. Typically, pre-tax dollars are moved into a traditional IRA, and any Roth dollars in the work plan are rolled to a Roth IRA. These are straightforward transactions. But what about after-tax (non-Roth) dollars that may exist in a work plan? (Some plans allow after-tax contributions.) When after-tax dollars are rolled out of the work plan, they are permitted to go to either a traditional IRA or a Roth IRA. In fact, as discussed below, even standard pre-tax plan dollars are allowed to be rolled to either a traditional or Roth IRA.

Historically (assuming no in-plan conversion prior to the rollover), if a person wanted to convert after-tax (non-Roth) or pre-tax plan dollars to a Roth IRA, those dollars first had to be routed through a traditional IRA. Once in the traditional IRA, they could then be converted to their final destination – a Roth IRA.

No longer is this the case. As part of the Pension Protection Act of 2006, Roth conversions can be done directly from company plans. Just like a person can fly direct from LAX to ATL and avoid a layover in another city, after-tax and pre-tax 401(k) dollars can take off from the plan and land directly in a Roth IRA. This is a valid conversion. While a direct rollover to a Roth IRA is not subject to 20% withholding, be aware that pre-tax assets rolled over are includable in income. (Note that if a plan participant elects to do a 60-day rollover, where the check is made payable to the participant, the 20% withholding is mandatory.)

Thankfully, such “mid-air” or “in-flight” Roth conversions are permitted. While routing pre-tax 401(k) plan dollars through a traditional IRA requires an extra step (a “layover” in the traditional IRA), no other major issues typically present themselves. However, routing after-tax (non-Roth) monies through a traditional IRA creates, potentially, more obstacles. For example, the pro-rata rule dictates that a person cannot simply cherry pick the after-tax dollars in their IRA and only convert those. If after-tax dollars are commingled with pre-tax funds in a traditional IRA, pro-rata becomes a significant and on-going concern. While there are ways to deal with the pro-rata rule, a “mid-air” tax-free conversion of after-tax dollars eliminates any pro-rata worries.

Like flying direct, “mid-air” conversions can save time and minimize potential problems. If there is no reason for a layover in a traditional IRA, then why do it? Pre-tax and after-tax dollars can take a direct route from the plan to a Roth IRA. Of course, converted pre-tax dollars are added to income, so be sure you have the money to pay the taxes due on the conversion. Planes can’t fly backwards, so there is no way to reverse the transaction

https://www.irahelp.com/slottreport/%E2%80%9Cmid-air%E2%80%9D-roth-conversions

MORE ON THE ROTH CATCH-UP CONTRIBUTIONS DELAY

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

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

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

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

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

THE 10-YEAR RULE AND 529 PLANS: TODAY’S SLOTT REPORT MAILBAG

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

Question:

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

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

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

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

Thank you.

Answer:

Hi Bruce,

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

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

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

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

Question:

Hello,

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

Thank you,

Richard

Answer:

Hi Richard,

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

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

RULES FOR INHERITED IRAS THAT MAY SURPRISE NONSPOUSE BENEFICIARIES

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

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

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

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

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

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

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

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

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

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

IRA BENEFICIARY PAYOUT RULES – THE MADNESS CONTINUES

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

 

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

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

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

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

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

So, these are her choices:

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

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

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

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

IRS DELAYS EFFECTIVE DATE OF MANDATORY ROTH CATCH-UP RULE UNTIL 2026

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

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

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

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

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

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

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

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

 

THE AGE 50 EXCEPTION AND THE STILL-WORKING EXCEPTION: TODAY’S SLOTT REPORT MAILBAG

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

QUESTION:

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

Thanks,

Brandon

ANSWER:

Brandon,

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

QUESTION:

Hi there,

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

Thanks,

John

ANSWER:

John,

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

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