IRA BLOG

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

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

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

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

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

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

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

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

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

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

Question:

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

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

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

Thanks,

Dale

Answer:

Hi Dale,

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

Question:

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

Noreen

Answer:

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

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

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

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

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

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

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

How Excess IRA Contributions Happen

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

NIA No Longer Subject to 10% Penalty

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Question:

Hi,

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

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

Thank you for your assistance.

Elly

Answer:

Hi Elly,

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

Question:

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

Thanks,

Paul

Answer:

Hi Paul,

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

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

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

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

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

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

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

Elective Deferral Limit

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

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

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

Overall Contribution Limit

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

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

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

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

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

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

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

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

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

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

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

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

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

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

QUESTION:

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

ANSWER:

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

QUESTION:

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

Thanks,

Emile

ANSWER:

Emile,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Question:

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

Answer:

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

Question:

Hi Ed,

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

Can you please help us clarify this?

Thank you

Janine

Answer:

Hi Janine,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Age 75
For Births on January 1, 1960 or Later

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

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

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

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

Question:

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

Answer:

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

Question:

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

Any help or insight would be great.

Thanks much,

Wesley

Answer:

Hi Wesley,

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

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

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

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

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

https://www.irahelp.com/slottreport/secure-20-changes-already-effect

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

SECURE 2.0 is now the law of the land and one thing is very clear. Roth-O-Mania is here! In their quest for more revenue, Congress has created more options to save with Roth accounts. These accounts bring in the immediate revenue that Congress desperately needs. For retirement savers, these Roth options offer the promise of potential tax-free earnings and withdrawals down the road.

Here are 5 new Roth savings opportunities brought by SECURE 2.0:

1. Roth SEPs and SIMPLEs. Beginning in 2023, SEP and SIMPLE plans can allow Roth contributions. This is great news if you are a small employer. Now these easy and inexpensive retirement plans can offer a Roth option. You may need to be a little patient here. The logistics involved in getting SEP and SIMPLE Roth plans off the ground likely will mean that custodians will not have these options immediately available.

2. Roth Employer Matches. Prior to SECURE 2.0, employer matching contributions to a plan had to be made on a pretax basis. The new law changes this and allows plans to offer employees the option of having matching contributions made to a Roth account. If your employer makes a Roth matching contribution, you will pay income tax on it. This provision is effective for 2023.

3. Rollovers from 529 Plans to Roth IRAs. SECURE 2.0 allows rollovers from 529 plans to Roth IRAs. This provision is effective in 2024. If you had concerns about what to do with funds left over in a 529 plan, this may be a good opportunity. Leftover 529 funds can now be rolled over to a Roth IRA in the name of the 529 beneficiary. However, there are restrictions. For example, the 529 plan must have been in place for 15 years, annual rollovers cannot exceed the annual Roth IRA contribution limit, and total lifetime rollovers cannot exceed $35,000.

4. No Lifetime RMDs for Roth plans. Unlike Roth IRAs, Roth accounts in workplace plans have been subject to RMDs during the owner’s lifetime. Beginning in 2024, this will no longer be the case. Your Roth plan dollars will be excluded from the RMD calculation.

5. More Roth Catch-Up Contributions. As you get closer to retirement, the rules allow you to step up your retirement plan contributions. Starting in 2024, if you are higher income, age-50 or older, and you want to make catch-up plan contributions, you must make them as Roth contributions.

https://www.irahelp.com/slottreport/roth-o-mania

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

Question:

Hello Ed,

I have a question concerning Secure 2.0 pertaining to transferring “leftover” 529 plan account balances into a Roth IRA, beginning 2024. If I have no income in 2024, can I still transfer/contribute leftover 529 plan funds into a Roth IRA?  Thank you!

Mark

Answer:

Mark,

Only the beneficiary of the 529 (for example, the child for whom the 529 was created for) can receive the “leftover” 529 dollars into their own Roth IRA as a rollover. But there are limits. A lifetime maximum of $35,000 can be rolled over, the 529 must have been open for more than 15 years, and the annual rollover amount cannot exceed the annual IRA contribution limits. If you (Mark) are the beneficiary of this 529 but have no earned income, then you cannot roll any 529 funds into your own Roth IRA, because you are not eligible to contribute to an IRA (no income). If your child is the beneficiary of the 529, and if your child has earned income (i.e., is otherwise eligible to contribute to an IRA), then 529 dollars can be rolled into a Roth IRA for the child, despite you, as the parent, having no earned income.

Question:

I am currently 72 and already have several Roth IRA accounts. If I open a new Roth IRA today, will I need to wait 5 years to make an income-tax free withdrawal on the new account even though I have other established Roth accounts that have been in place for over 5 years?

Answer:

No, you will not have to wait 5 years for tax-free withdrawals from the new Roth IRA. Since you are over age 59 ½, and since you have had another Roth IRA opened for more than 5 years, you have met your obligations to have immediate tax-free withdrawals from the new account. The IRS does not care if you have multiple Roth IRAs held at multiple custodians. All they see is one big Roth IRA bucket, your age, and your original Roth IRA start year from more than 5 years ago.

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

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

If a person has a Traditional IRA and is of the age when lifetime required minimum distributions (RMDs) apply, then that person must withdraw a portion of that account annually. The amount to be withdrawn is based on the year-end balance from the previous year and a life expectancy factor as determined by one of the life expectancy tables. The rationale for RMDs is, the IRS permitted the account owner to delay paying taxes on the IRA dollars for potentially decades. Now it is time for the account owner to keep his end of the bargain and pay up. This is all straightforward enough.

If this same person also owns a Roth IRA, there are no RMDs to worry about during his lifetime. This makes logical sense. Roth IRA contributions are made with after-tax dollars, and the ultimate benefit of Roth IRAs is that any earnings within the account grow tax-free. Since existing Roth IRAs do not create any tax revenue for the government, there is no reason to force distributions like a traditional IRA. (Roth IRA dollars cannot remain in the account forever. Beneficiaries of these accounts do have to deplete them over a certain period. This pushes Roth IRA dollars back into circulation and out from under the tax-free umbrella.)

If this same IRA owner mentioned above also participated in a 401(k) through his employer, he would have an RMD on the entire balance within the plan. Regardless of whether the 401(k) dollars were held within the pre-tax “bucket” in the plan or the Roth bucket, all dollars would be factored into the RMD calculation.

This was the case until recently. Beginning in 2024, SECURE 2.0 eliminates the need to take RMDs on Roth plan dollars. This makes logical sense and brings Roth plan rules more in line with Roth IRA rules.

Example: John is 75 and retired. He has a 401(k) with a total balance as of December 31, 2022 of $1 million. This is split equally between pre-tax and Roth plan dollars. Based on his age, John will use a factor of 24.6 (from the Uniform Lifetime Table) to calculate his 2023 RMD. $1 million divided by 24.6 results in a 2023 RMD for the 401(k) of $40,651. John will need to take this RMD before the end of the year.

In 2024, the new SECURE 2.0 rule eliminating Roth plan dollars from the RMD calculation goes into effect. After John withdraws the 2023 RMD (and based on market fluctuations throughout the year), John’s 401(k) balance on December 31, 2023 is back to $1 million. It remains equally divided ($500K each) between pre-tax and Roth. John’s 2024 RMD will be calculated only on the pre-tax portion of his account. As such, using the applicable factor for a 76-year-old (23.7), John’s 2024 RMD will only be $21,097.

This is welcome news for anyone with a workplace plan who has been subject to RMDs on the Roth dollars within that plan. Historically, the only way for retirees to avoid RMDs on their Roth plan dollars was to roll over those funds to a Roth IRA. Beginning in 2024, thanks to SECURE 2.0, no longer will such a rollover be necessary to avoid unwanted RMDs on Roth plan dollars.

https://www.irahelp.com/slottreport/secure-20-eliminates-rmds-roth-plan-dollars-2024

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

We’re getting a lot of questions about the SECURE 2.0 provision allowing tax-free rollovers from 529 plans to Roth IRAs. Although this new rollover opportunity sounds exciting, there are a number of restrictions that may limit its appeal.

Section 529 plans offer a great opportunity to pay for college, K-12 tuition and student loan repayments. Nearly every state offers at least one plan. The most popular type of 529 plans are college savings plans, in which you make after-tax contributions that are invested in mutual funds or ETFs offered under the plan. Earnings grow tax-free, and you can withdraw the account tax-free if you use it for qualified educational expenses. You also may be able to take a state tax deduction for at least part of your contribution.

However, sometimes parents wind up not using the entire 529 account because, for example, their child gets a scholarship or doesn’t go to college. If you withdraw funds and don’t use them for educational expenses, the earnings in your account will be subject to income tax and a 10% penalty. The risk of unused funds has caused many parents to fund 529 plans conservatively or not to fund them at all.

In SECURE 2.0, signed into law on December 29, 2022, Congress attempted to address this problem. Starting in 2024, beneficiaries of 529 college savings accounts (e.g., children or grandchildren) will be allowed to do a tax-free rollover of up to $35,000 to a Roth IRA.

As usual, however, the “devil is in the details.” Here are those details:

• The $35,000 limit is a lifetime maximum.
• The Roth IRA must be in the name of the 529 beneficiary – not the 529 owner (if different).
• The 529 plan must have been open for more than 15 years. It’s not clear whether a new 15-year waiting period is required when someone changes 529 beneficiaries or if the waiting period that applied to the prior beneficiary can be tacked on. We’ll need further clarification from Congress or the IRS.
• Rollover amounts can’t include any 529 contributions (and earnings on those contributions) made in the preceding five-year period.
• Rollovers are subject to the annual Roth IRA contribution limit. So, for example, if the Roth IRA contribution limit in 2024 remains $6,500, then no more than $6,500 can be rolled over from a 529 to a Roth IRA in 2024. Further, any actual Roth IRA (or traditional IRA) contributions made by the 529 beneficiary would count against the $6,500 limit. The effect of this rule is that a full $35,000 529-to-Roth IRA rollover would need to be done over several years. It also means that the 529 beneficiary doing the rollover must have compensation in that year at least equal to the amount being rolled over.
• By contrast, the income limitations on Roth IRA contributions don’t apply to these rollovers. A 529 beneficiary would be able to do a 529-to-Roth IRA rollover even if she earns too much to make a Roth IRA contribution for that year.

https://www.irahelp.com/slottreport/secure-20-allows-rollovers-529-funds-roth-iras

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

Question:

I am confused regarding the requirements for making a qualified charitable distribution. Is it necessary for the donation to be sent directly from the financial company to the charity, or can the check be made out to the charity but sent to me and then sent to the charity?

Thank you,

John

Answer:

Hi John,

We get a lot of questions about the mechanics of doing a qualified charitable distribution (QCD) correctly. The rules require a direct transfer from your IRA to the charity. Either of the methods you describe would satisfy this requirement. What would not work would be having the check be made payable to you and then your giving the funds to the charity.

Question:

Hi Ed,

Very much appreciate all you and your team do. My question is as follows:

Client aged 78, took full $25,000 RMD in November 2022 from his IRA. The custodian mistakenly sent him an extra $10,000 on the last day of the year from the same IRA. Can we do a 60-day rollover and roll the $10,000 back into the IRA before we take the RMD in 2023? Or, will he need to first take this year’s RMD before he can roll it back into the IRA? Or, does neither option work?

Thanks

Answer:

Your client does have the opportunity to do a 60-day rollover. The $10,000 is not part of the 2022 RMD so it would be rollover eligible as long as all the other requirements for a rollover are met, such as the 60-day deadline and no other rollovers within the last 356 days.

The rollover can be done before the RMD for 2023 is taken. The first money out of an IRA during the year is considered an RMD (the “first-money-out” rule.) The $10,000 would be a rollover deposit and not a distribution, so that rule would not apply in your situation. There have not been any distributions in 2023 yet. Just be sure to add the $10,000 that was outstanding at year end to the balance used to calculate the 2023 RMD.

https://www.irahelp.com/slottreport/qcds-and-60-day-rollovers-todays-slott-report-mailbag

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

One of the provisions of the recently passed SECURE 2.0 that has gotten the most attentions is the one that allows some retirement account owners to delay their required minimum distributions (RMDs) a little longer. The new law pushes back the RMD age from 72 to 73. Eventually, it will go to 75, but that is not for another decade.

Who can benefit from this new rule?

The delayed RMD age applies to those who reach age 72 in 2023 or later. They will not have to start taking RMDs until next year (2024) when they reach age 73. The deadline for taking their first RMD would be April 1, 2025.

Example: Mick Mars, guitarist for the heavy metal band Motley Crue, will no doubt celebrate his 72nd birthday on May 4, 2023, with an all-night rager. He can also celebrate being able to delay his RMD from his retirement account. Mick will have to start taking RMDs for 2024 when he reaches age 73. He will need to take his first RMD by April 1, 2025.

Those who reached age 72 in 2022 are not so fortunate. They will be 73 in 2023, but they must continue to take RMDs.

Example: Stevie Van Zandt, guitarist for Bruce Springsteen and the E Street Band, may be born to run but he cannot run away from RMDs. He reached age 72 on November 22, 2022. He must take an RMD for 2022 by April 1, 2023, and will have to take his 2023 RMD by December 31, 2023.

Takeaway

If you reach age 72 this year, you are like Mick and you catch a break under SECURE 2.0. You can delay your RMD a little longer. You can party hard like Mick and celebrate that on your 72nd birthday.

However, if you are reaching age 73 this year, you and Stevie have something in common. You can’t outrun your 2023 RMD. You will need to take it by the end of this year.

https://www.irahelp.com/slottreport/who-can-delay-their-rmd-under-secure-20

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

SECURE 2.0 includes a number of new ways a person under the age of 59 ½ can access retirement account dollars while avoiding the 10% penalty. Historically, there have been more than a dozen ways to sidestep the extra charge. Things like first-time homebuyer costs, higher education costs and disability are all legitimate exceptions to the early distribution penalty. While taxes could still apply, the 10% penalty is off the table for eligible distributions. Here are two of the new “penalty-free access points” to both IRA and company plan retirement accounts made available in SECURE 2.0:

Domestic Abuse. Sadly, domestic abuse is a common enough occurrence that it was included as a 10% penalty exception. Effective in 2024, a new exception is created for victims of domestic abuse that occurred within the previous 12 months by a spouse or domestic partner. Those in need of leveraging this exception can self-certify that they experienced domestic abuse and withdraw the lesser of $10,000, indexed for inflation, or 50 percent of the balance of the account.

This new exception is applicable to plans – like a 401(k) – and IRAs. “Domestic abuse” is defined as physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim, or to undermine the victim’s ability to reason independently, including by means of abuse of the victim’s child or another family member living in the household. Distributions taken under the domestic abuse exception can be repaid to the same or another like account over 3 years, and income taxes on repaid dollars will be refunded.

Financial Emergencies. In court case after court case, defendants pleaded for mercy when it came to waiving the 10% penalty after they withdrew their retirement dollars early. Consistently the same tune is played: “It was a true emergency,” or, “I was in dire straits and needed emergency money.” While I no doubt believe many of these defendants, the tax courts have consistently avoided setting any precedent for early access. Time after time the courts have declined any sort of one-off waiver. SECURE 2.0 cracks the door, albeit slightly, to those in need of emergency funds.

Effective in 2024, the new legislation includes a 10% penalty waiver for financial emergencies. However, this exception is extremely limited. Yes, if a person faces unforeseeable personal expenses or immediate financial needs relating to a personal or family emergency, they may dip into savings. Yes, the account owner can self-certify that the emergency is real. (No need for an independent financial analysis.) But the dollar amount is limited.

Distributions using the financial emergency exception are limited to one per calendar year and a maximum amount of $1,000. Additionally, no other emergency distributions may be taken in the following three years, or until the original distribution is repaid, or future salary deferrals (for plans) or contributions (for IRAs) meet or exceed the amount of the emergency personal expense distribution. This means that the retirement account must be made whole before any future emergency distributions using the exception can be taken.

$1,000 is no windfall, but it could help a person keep their head above water.

https://www.irahelp.com/slottreport/new-secure-20-10-penalty-exceptions-domestic-abuse-financial-emergencies

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

Question:

On reading your SECURE 2.0 information, a revised RMD (required minimum distribution) to age 73 was mentioned. Prior to this new legislation, 72 was the RMD age. If this is in effect now in 2023, is it correct that if you turn 72 in 2023, you won’t be required to take an RMD in 2023? Based on what I’ve read, the first RMD for a 72 year-old in 2023 would be pushed to age 73 in 2024?

Thanks in advance for your insights!

Answer:

You are correct. Anyone turning age 72 in 2023 is covered by the new SECURE 2.0 RMD rules. So, that person’s first RMD is due for the year he turns 73, which is 2024. There is no RMD for 2023. Additionally, the first RMD for 2024 can be delayed until April 1, 2025, but then there will be two RMDs in 2025 – the 2024 RMD and the 2025 RMD (due by December 31, 2025).

Question:

Does the IRS Uniform Lifetime Table change for those who will not have to take RMDs until they are 73 years of age?

Thanks,

Rick

Answer:

Hi Rick,

No, the Uniform Lifetime Table that became effective in 2022 will remain in place. So, when someone is required to start taking RMDs in the age 73 year, they would use a 26.5 life expectancy factor.

https://www.irahelp.com/slottreport/rmds-under-secure-act-20-todays-slott-report-mailbag

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

In our December 28 and January 2 Slott Report articles, we focused mostly on the provisions of the new SECURE 2.0 law that apply to IRAs. But many of the law’s changes are directed towards workplace plans, such as 401(k)s.

Here’s a rundown of the most important plan changes:

• RMDs for Roth 401(k)s. One of the big differences between Roth IRAs and Roth plan accounts has been that Roth IRA owners are not subject to required minimum distributions (RMDs), while Roth 401(k) participants are. This will change beginning in 2024, when Roth 401(k) accounts also become exempt from RMDs.
• Higher Catch-Up Contributions. If you’re age 50 or older, your plan probably allows you to make catch-up contributions above the regular deferral limit. For example, in 2023, you can make an extra $7,500 on top of the regular $22,500 of deferrals. Starting in 2025, employees age 60, 61, 62 or 63 can make even higher catch-up contributions. The age 60-63 catch-up limit for 2025 will be 150% of the regular catch-up limit in effect for 2024. (Higher catch-ups will also be available for SIMPLE IRA participants.)
• Mandatory Roth Catch-Up Contributions. Starting in 2024, certain age-50-or-older plan participants who want to make catch-up contributions must make them as Roth contributions. This rule applies to anyone with wages in excess of $145,000 (indexed for inflation) in the previous year (assuming their plan has a Roth option). Because of the reference in the law to “wages,” it appears that self-employed individuals (who don’t have wages) can continue to make catch-ups on a pre-tax basis.
• Roth Employer Contributions. Up to now, plan employer contributions have always been made on a pre-tax basis. Effective immediately, SECURE 2.0 allows (but doesn’t require) plans to offer employees the option of having company contributions made to a Roth account. Anyone choosing this option will pay income tax on the Roth contribution.
• Matches on Student Debt. Starting in 2024, SECURE 2.0 allows employers to make matching plan contributions on student loan repayments made by employees. This is optional.
• Solo 401(k)s. Currently, a self-employed person who wants to open a new solo 401(k) and make elective deferrals must establish the plan by December 31 of the plan’s first year. Under SECURE 2.0, sole proprietors (and other similarly-taxed businesses) now have until the due date (without extensions) of the individual’s tax return to open a new plan for the prior year. This applies to plans that start up in 2023 or later.
• Auto-Enrollment for New Plans. Beginning in 2024, many newly-established company plans will be required to automatically enroll employees in the plan – unless they choose to opt out. However, contrary to certain news reports, this provisions doesn’t apply to existing plans.
• Emergency Savings Accounts. Another new option for employers is to offer lower-paid workers a special sub-account within the plan for emergency savings contributions made on a Roth basis. Lifetime employee contributions to these accounts are limited to $2,500 (or a lower amount set by the employer). These contributions must be held in safe investments, and there are relaxed distribution rules, including no 10% penalty for those under age 59 ½. Emergency savings accounts are available in 2024.

https://www.irahelp.com/slottreport/secure-20-changes-apply-workplace-plans

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

The year 2023 has arrived. It is a new year, and we have new rules for retirement accounts thanks to SECURE 2.0 which Congress passed in the waning days of last year. SECURE 2.0 is a giant piece of legislation, clocking in at over 300 pages, and some of its provisions will not be effective for years to come. Here are some of our top takeaways from the SECURE 2.0 provisions that are effective right away.

1. The RMD age is delayed to 2023. For years the required minimum distribution (RMD) age was 70 1/2. Then the SECURE Act changed it to 72. For 2023, SECURE 2.0 has again pushed it back. The age that RMDs are effective is increased to 73 starting in 2023. This won’t help everyone. Anyone currently subject to RMDs under the old 70 ½ or 72 RMD age rules is not impacted and must continue to follow their existing RMD schedule.

For all those retirees who do not want to take an RMD or pay a tax bill for as long as possible. this is good news. This provision is helpful for who don’t need the money, and it also opens the door to another year of Roth conversions without concerns about RMDs.

However, for those who need to use the money in their retirement accounts for living expenses, the delay won’t matter. Also, even for those who want to take advantage of it, there is a downside since ultimately the funds in the account will need to come out. Future delayed RMDs will likely be larger, based on a higher account balance and a shorter life expectancy.

2. “Rothification” is here. Beginning in 2023, SEP and SIMPLE plans can allow Roth contributions. Also, plans can allow employer contributions to be made on a Roth (after-tax) basis. In future years, there will be even more opportunities to funds Roth accounts.

The logistics involved in getting SEP and SIMPLE Roth plans off the ground make it unlikely that these options will be available immediately as custodians will need some time to implement them.

SECURE 2.0 confirms that that the “Rothification” of retirement accounts has begun in earnest as Congress is opening the door to more Roth savings possibilities in its search for immediate tax revenue. What happens down the road when all tax-free Roth accounts translate into lost revenue is someone else’s problem.

3. Expanded exceptions to the 10% early distribution penalty. For 2023, SECURE 2.0 expands the age 50 exception by adding new categories of public safety workers and allowing penalty-free distributions after 25 years of service. SECURE 2.0 also includes a slew of new exceptions to the 10% early distribution penalty. Two of these are effective in 2023. Victims of disasters and those who are terminally ill will be able to access their retirement accounts early without penalty.

Congress recognizes that sometimes life happens, and people will need access early to their retirement funds. This is helpful for those in dire straits. The disaster provision is especially important because in the past such relief has been administered on an ad hoc basis and subject to political whims. For example, some hurricane victims got relief but victims of Superstorm Sandy were denied similar treatment.

The bad news here is that adding to an ever-growing list of exceptions only increases the likelihood of leakage of retirement savings dollars, and that will  prevent many Americans from having enough savings at retirement.

4. Missed RMD Penalty Changes. SECURE 2.0 reduces the penalty for missed RMDs from 50% to 25%. Additionally, if the corrected action is taken in a timely manner the penalty is further reduced to 10%.

On its face this seems like a good thing. However, the 50% penalty was seldom enforced and often waived for those who sought relief. The new rules may mean a smaller penalty but more people paying. This could translate into bad news for retirees but good news for Uncle Sam as the government collects more revenue.

5. Rollovers from 529 plans to Roth IRAs. SECURE 2.0 allows rollovers from 529 plans to Roth IRAs. This provision is not effective until 2024. It is NOT effective for 2023, but it is generating so much talk that it is worth mentioning.

This is great strategy for those who had concerns about funds left over in 529 plans if a child decided not to go to college or was fortunate enough to get a scholarship. Now these funds can potentially be rolled over to a Roth IRA. However, this is not the great Roth IRA strategy that some have been touting. There are many restrictions. The 529 plan must have been in place for over 15 years, the annual rollovers cannot exceed the annual Roth IRA contribution limit, and the total lifetime rollovers cannot exceed $35,000. There are other limitations as well.

https://www.irahelp.com/slottreport/top-takeaways-secure-20-2023

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

QUESTION:

I have an inherited IRA from my father. He was born 9-27-1927 and died 7-19-2019 at age 91. I was born 12-13-1952 and my age is 70. Two on-line calculators offered by brokerages show the factor this year (2022) to be 18.4 on my inherited IRA from my father. I cannot verify that factor on any of the IRS tables. Could you copy me or direct me to the correct table?

Many thanks,

Jim

ANSWER:

Jim,

Since you were born in 1952, you turned 67 in the year your dad passed away (2019). Required minimum distributions (RMDs) on that account started in 2020 when you turned 68. (Even though RMDs were waived in 2020 by the CARES Act, we still use 2020 to calculate future RMDs.) Using 68 and the Single Life Expectancy Table, your corresponding factor in 2020 was 20.4. We then subtract 1 from that original factor for each successive year. In 2022 your RMD factor is down to 18.4. In 2023 it will be 17.4, etc. Note that we must use the new version of the Single Life Expectancy Table introduced in 2022 and overlay those numbers back to your first RMD year in 2020.

QUESTION:

Can a client convert SIMPLE IRA assets to a Roth?  Thank you for your help.

Hugh

ANSWER:

Hugh,

Historically, SIMPLE plans were not allowed to maintain a Roth component. Meaning, you could not house Roth dollars within a SIMPLE. However, pre-tax SIMPLE dollars can be converted to a Roth IRA, which will exist outside of the confines of the SIMPLE plan. Be aware that, to avoid any penalties, there is a 2-year wait period before SIMPLE dollars can be withdrawn or converted to a Roth IRA. (*Note that SECURE 2.0, passed just last week, allows SIMPLE plans to have a Roth component beginning in 2023. How pre-tax SIMPLE dollars can be converted to Roth SIMPLE within the plan is still unknown.)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here are some highlights:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Stay Tuned in 2023

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

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

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

Question:

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

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

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

Regards,

Bret

Answer:

Hi Brett,

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

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

Question:

Hello,

I found you via Google search!

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

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

Thank you.

Answer:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2. What books have you read on the topic?

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

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

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

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

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

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

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

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

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

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

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

Question:

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

Thank you.

Pam

Answer:

Hi Pam,

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

Question:

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

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

Thanks,

Anthony

Answer:

Hi Anthony,

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

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

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

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

• Take an RMD from your retirement account. If you have a traditional IRA and you are age 73 or older you will need to take a 2022 required minimum distribution (RMD) by the end of the year. If you are 72 in 2022, you will have a little extra time to take your first RMD. Your deadline will be April 1, 2023. Those who must take an RMD for 2022 should get this done sooner rather than later. May custodians have earlier internal deadlines to process these transactions and waiting until the last minute can result in mistakes. The penalty for not taking an RMD is a hefty 50%.

• Take an RMD from an inherited IRA. Many beneficiaries are required to take 2022 RMDs from inherited IRAs. If you inherited an IRA prior to the SECURE Act or if you are an eligible designated beneficiary who inherited in 2020 or 2021, you will need to take an RMD for this year. Beneficiaries are also responsible for the year-of-death RMD if the IRA owner did not take it prior to death. (Beneficiaries subject to the 10-year payout rule under the SECURE Act catch a break. The IRS has waived the 50% penalty for 2022 RMDs that are not taken when a beneficiary is subject to the 10-year rule due to all the confusion surrounding this new rule.)

• ​Do a QCD. The holiday season is the time when many are feeling charitable. A good way to give if you have an IRA and are age 70 ½ or older is to do a qualified charitable distribution (QCD). This is a tax-free transfer directly from your IRA to the charity of your choice. The annual limit is $100,000. A QCD can satisfy an RMD and is not included in modified adjusted gross income. There is no such thing as a prior-year QCD, so if this strategy is of interest to you for this year, you will need to get it done by December 31, 2022.
• Convert to a Roth IRA. Tax rates are historically low, and markets have come down from their previous heights. Those conditions are ideal for Roth IRA conversions. Time is running out though for 2022. The deadline for converting for this year is December 31, 2022.

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

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

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

IRA and Roth IRA Contributions

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

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

Roth IRA Compensation Limits

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

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

SEP and SIMPLE IRA Contributions

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

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

Workplace Savings Plans

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

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

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

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

QUESTION:

Hello Mr. Slott,

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

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

Thanks in advance for any help you can provide,

Carol

ANSWER:

Carol,

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

QUESTION:

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

Thank you!

David

ANSWER:

David,

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

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

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

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

This is not one of those articles.

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

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

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

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

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

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

Hopefully that family can find some peace this holiday season.

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

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

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

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

A. His Traditional IRA and his Roth IRA

B. His Traditional IRA and his 401(k)

C. All three retirement accounts

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

A.     December 31, 2022

B.     December 31, 2023

C.     April 1, 2023

D.    April 15, 2023

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

A. The Single Life Expectancy Table

B. The Uniform Life Expectancy Table

C. The Joint Life Expectancy Table

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

A. True

B. False

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

A. A 6% penalty

B. A 10% penalty

C. A 25% penalty

D. A 50% penalty

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

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

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

Question:

Hi,

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

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

Sincerely,

Kevin

Answer:

Hi Kevin,

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

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

Question:

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

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

Answer:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Happy Thanksgiving from all of us at the Slott Report!

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

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

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

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

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

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

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

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

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

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

Question:

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

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

Thank you!

Jeanne

Answer:

Jeanne,

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

Question:

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

Thank you so much!

Answer:

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

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

By Andy Ives, CFP®, AIF®
IRA Analyst

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Question:

Good morning,

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

Frank

Answer:

Hi Frank,

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

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

Question:

Ed & Company,

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

Thanks.

Sharon

Answer:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Question:

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

Thank you for your help,

John

Answer:

Dear John,

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

Question:

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

Answer:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

QUESTION:

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

Howard

ANSWER:

Howard,

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

QUESTION:

Dear Roth IRA experts,

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

Thank you so much!

Roger

ANSWER:

Roger,

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

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

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

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

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

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

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

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

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

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

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

Question:

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

Answer:

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

Question:

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

Thank you,

Mike Otto

Answer:

Hi Mike,

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

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

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

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

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

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

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

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

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

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

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

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

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

Question:

Hello,

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

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

Thank you.

Answer:

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

Question:

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

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

Thank you.

Todd

Answer:

Hi Todd,

Thank you for the nice compliment!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Question:

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

Answer:

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

Question:

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

Thank you.

Diane

Answer:

Diane,

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

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

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

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

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

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

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

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

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

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

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

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

Question:

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

Kim

Answer:

Hi Kim,

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

Question:

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

Thanks,

Bill

Answer:

Hi Bill,

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

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

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

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

October 17, 2022 Deadline

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

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

How to Fix the Excess Contribution

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

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

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

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

Professional Advice Needed

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

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

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

Question:

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

Answer:

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

Question:

Hello,

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

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

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

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

Greg

Answer:

Hi Greg,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Question:

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

Tim

Answer:

Tim,

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

Question:

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

Sincerely,

Collin

Answer:

Collin,

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

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

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

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

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

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

2. You are able to use the Joint Life Expectancy Table for Required Minimum Distributions (RMDS): When you reach age 72, you must start taking distribution annually, called required minimum distributions. These are calculated by using life expectancy tables provided by the IRS. IRA spouse beneficiaries who are more than ten years younger than the IRA owner may use the Joint Life Expectancy Table. This results in smaller RMDs versus using the Uniform Lifetime Table, which is required to be used to calculate lifetime RMDs for all other IRA owners.

3. You have special benefits as a spouse beneficiary. The benefits of being married continue even after the death of a spouse. Only a spouse beneficiary can roll over or transfer an inherited IRA from a deceased spouse into their own IRA. This is known as a spousal rollover. There is no deadline for a spousal rollover. Once the spousal rollover is done, the funds are treated like any other IRA funds you own. There are no RMDs if you are not yet age 72. Non-spouse beneficiaries do not have this option.

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

As a spouse beneficiary you can take advantage of a rule unavailable to non-spouse beneficiaries. If you are the sole beneficiary, and if your spouse dies before their required beginning date (RBD) – when RNDs are to begin – you can delay RMDs from the inherited IRA until the year your spouse would have attained age 72. That can mean a delay of many years before RMDs from the inherited IRA must begin.

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

Best wishes to all the new brides and grooms!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Barbara

Answer:

Hi Barbara,

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

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

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

Question:

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

Thank you for your help.

Barry

Answer:

Hi Barry,

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

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

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

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

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

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

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

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

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

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

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

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

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

Question:

Hi Mr Slott,

I read somewhere but couldn’t remember where, if a person needs to withdraw an RMD but doesn’t need the money, can he convert this RMD to a Roth IRA?

Thanks in advance

Answer:

This is an area where there is a lot of confusion. An RMD cannot be converted to a Roth IRA. The reason for this is the tax rules are very clear that an RMD is not eligible for rollover, and a conversion is considered to be a type of rollover. The correct way to handle this situation is to take the RMD from the IRA and then convert the remainder of the IRA or any portion of it. The RMD cannot be deposited as part of the conversion.

Question:

My client passed away in 2021.  He had an IRA, for which he made his (at the time) revocable living trust the sole beneficiary.  He had one son who is the sole beneficiary of his estate.  As I read the regulations, I believe the son fits the fact pattern to be treated as a designated beneficiary since the son is the sole beneficiary of the trust and its assets.  As such, I have concluded that the son falls into the category of designated beneficiary (not an Eligible Designated Beneficiary) and therefore has 10 years to liquidate the IRA.  My client had already begun to take RMDs prior to his passing.   Based on the February proposed IRS regulations, will the son need to take “stretch RMDs” in years 1-9 and the balance in year 10?

Regards,

Jack

Answer:

Hi Jack,

We agree with your analysis. If the trust meets the look-through rules and the son is considered a designated beneficiary, the 10-year payout rule would apply to the trust. That would mean that the inherited IRA would need to be paid out to the trust by the end of the tenth year following the year of death. The new IRS proposed regulations do add an additional twist. Since the IRA owner died on or after his required beginning date, the trust does need to take RMDs based on the single life expectancy of the son during years one through nine of the 10-year period. If the IRA owner died in 2021, the first RMD based on this calculation would be due by the end of 2022.

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

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

Questions on how age affects the decision to convert to a Roth IRA are common. What age is too old to convert? There is no easy answer to this question because there is no magic age when conversion makes the most sense or no longer makes sense at all. Conversion can be the right move at any age.

Younger Savers

Roth IRA conversions for younger people are a usually a smart strategy. This is no surprise. Younger people are generally in a lower tax bracket and have not yet accumulated large sums in their IRAs or 401(k)s. Also, time is on their side. They have a long timeline to save and accrue tax-free earnings in a Roth IRA.

Conversion comes with a tax bill. Any individual who converts should be reminded of that before moving ahead with the conversion. Younger people who may not have time to amass large amounts of savings should be prepared for the tax cost. Now that recharacterization is no longer available there is no way to undo a conversion to escape the tax hit.

Midlife Conversions

For those looking to convert in middle age, timing is critical. These individuals are likely to be in the peak earnings years and in the highest tax brackets. Conversion is best considered in a year when tax conditions are optimal, and when it can be done at a low tax rate or even at no tax cost at all with offsetting tax losses, deductions, or credits.

A tax year with a low tax bracket or with net operating losses from a business is good year for middle aged savers to consider conversion. Another strategy to investigate is doing a series of smaller annual Roth conversions over several years, to lessen the tax impact in each year.

Too Old to Convert? Think Again

There is no age when an individual is too old to convert. Older individuals may think that they do not have a long time to save, but that is overlooking the potential of conversion as an estate planning strategy.

For older individuals who do not need their retirement savings soon or at all, especially if they plan to pass these funds on to beneficiaries – the Roth conversion is an effective estate planning vehicle, and even more so now after the elimination of the stretch IRA under the SECURE Act. Most beneficiaries will be subject to the 10-year rule which can push the tax bill into a shorter time frame, leaving less for beneficiaries. A Roth conversion can eliminate the tax bill for beneficiaries, since the tax will be paid up front at conversion, possibly at lower tax rates available now.

Older individuals should also be advised that a Roth conversion does increase ordinary income for the year of the conversion – potentially causing the loss of valuable tax credits and deductions, taxation of Social Security, and increased premiums for Medicare Part B and Part D premiums. However, that additional income is only for one year, and the trade off is future tax-free earnings and tax-free distributions from the Roth IRA.

https://www.irahelp.com/slottreport/your-age-and-your-roth-ira-conversion

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

Here’s a common question: An employee retires in or after the year he turns 72 and wants to roll over his 401(k) funds to an IRA. Does an RMD have to be taken before the funds are rolled over?

What makes this tricky is that required minimum distributions (RMDs) normally don’t need to start until April 1 following the age 72 year (or April 1 following the year of retirement for someone using the “still-working exception”). That April 1 is considered the employee’s required beginning date (RBD).

If the 401(k)-to-IRA rollover takes place before the RBD, it would make sense that no RMD should be required before the rollover occurs. But, as is the case with many IRA and workplace plan rules, what makes sense isn’t always the correct answer. The correct answer is that a RMD from the 401(k) must be taken first, and only what’s left can be rolled over.

How can that be? Well, first, the IRS says that the first funds distributed in a year in which an RMD is required are considered part of the RMD (the “first-dollars-out rule”). Second, the first year in 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 three rules together means that the first dollars received in the year of retirement on or after age 72 are part of the RMD and aren’t eligible for rollover.

If the RMD is rolled over, it is considered an excess contribution. To avoid penalty, excess contributions – along with earnings or losses attributable to the excess amount – must be returned by October 15 of the year following the year the contribution was made.

Example: Kaitlin works for Fourth Fifth National Bank and participates in its 401(k) plan. Kaitlin uses the still-working exception to delay plan RMDs beyond age 72. In 2022 at age 73, Kaitlin retires and elects to roll over her 401(k) balance of $400,000 to an IRA. She is aware that her RBD is not until April 1, 2023. For that reason, she rolls over the entire $400,000 (including her 2022 401(k) RMD, which we assume to be $15,000) to the IRA. Since the $15,000 was not eligible for rollover, it is now an excess contribution in the IRA. Kaitlin can fix the error without penalty by withdrawing $15,000, plus or minus earnings or losses on her IRA attributable to the $15,000, from the IRA by October 16, 2023.

Can Kaitlin avoid taking the 2022 RMD from her 401(k) in 2022? Yes, by delaying her 401(k) distribution/rollover until 2023. But then she would have to take two RMDs – the 2022 RMD and the 2023 RMD – before rolling over the rest of her funds.

https://www.irahelp.com/slottreport/caught-trap-rmds-401k-plans-year-retirement

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

QUESTION:

I have a client where we did a 60-day rollover this past January. The proceeds were put back into the account in less than 60 days. The client has asked me to rollover the 403(b) plan he’s had sitting with his former employer. Is this a second rollover violating the once-per-year rollover rule?

Thank you

Jay

ANSWER:

Jay,

You are wise to consider the one-rollover-per-year rule before completing any 60-day rollover. A person is only allowed one 60-day rollover per 365 days. However, the one-rollover-per-year rule is not applicable to plan-to-IRA rollovers. You can do as many of those as you wish. So, in your situation, the 403(b) asset can be rolled to an IRA without violating any rules. However, your client will need to wait until at least next January before he can do another IRA-to-IRA 60-day rollover.

QUESTION:

An eight-year-old daughter inherited her father’s 401(k) plan this year (2022). It was rolled into a traditional inherited IRA account. Does she have to take an RMD based on her life expectancy tables beginning in 2022, and then at age 18 deplete the balance over the next 10 years?

Steve

ANSWER:

As a minor child of the original account owner, the eight-year-old daughter qualifies as an eligible designated beneficiary (EDB) and is permitted to stretch RMD payments over her own single life expectancy. The first RMD will be in 2023 and she will use the factor from the Single Life Expectancy Table for age nine (75.9). For each year thereafter, she will subtract one from previous year’s factor. This will continue until she reaches the age of majority – 21. At that time the 10-year rule will apply. The daughter can continue the RMD payments for another 10 years, but the account must be emptied by the end of the 10th year.

https://www.irahelp.com/slottreport/60-day-rollovers-and-eligible-designated-beneficiaries-todays-slott-report-mailbag

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

An advisor called to discuss Roth IRA conversions. His new client made some decisions before speaking with him, and he was trying to untangle her self-inflicted knot. She was 69 years old, a single tax filer, still employed, and had a $1 million traditional IRA. Based on advice from her brother (who is not a financial professional), she had already ripped through Roth conversions of $200,000 for both 2021 and 2022. The brother’s only consideration in making his recommendation was, “The market is down.”

Uh-oh. And now we face the consequences.

First and foremost, Roth conversions cannot be undone. There is no recharacterizing a Roth conversion. (Roth contributions can still be recharacterized, but that is a different topic.) So, these $200K conversion knots could not be untied. Regardless, we still needed to explain the ramifications of the transactions and how to approach things differently in the years to come.

Taxes. Assuming this person had no after-tax dollars (basis) in her traditional IRA, then the entire conversion would be taxable. This year she added $200K of ordinary income to her roughly $50,000 of expected earnings. For a single filer who took the standard deduction in 2021 and will do so again in 2022, these balloon conversions most likely vaulted her from the 12% tax bracket all the way up to the 35% bracket. Maybe, with some creative planning, we could finagle a way to get her down to the 32% bracket, but she is definitively facing higher taxes.

A better solution would have been to consider tax brackets before she locked in a Roth conversion. Yes, the markets may be down as her brother said, but the tax brackets are stable. More precise conversions could have limited her to the 22% bracket or, if she was willing, inched her into the 24% bracket. For taxpayers who think rates will increase in the near future, maybe filling up the 24% bracket now (or even the 32% bracket) makes sense.

IRMAA. While tax brackets are steps, Income Related Monthly Adjustment Amount (IRMAA) surcharges for Medicare are a cliff. One dollar over an IRMAA bracket level and you dive headfirst into the next pool. As a single filer with $50,000 of income, this woman was in the bottom IRMAA bracket. By adding a $200,000 Roth conversion in both 2021 and 2022, she jumped to one of the highest brackets and will significantly increase her monthly costs in 2023 and 2024. (IRMAA charges are based on modified AGI from two years previous.) Take note – it is not just income tax brackets that must be considered before a conversion, but “stealth taxes” like IRMAA surcharges must also be part of the equation.

RMDs. Required minimum distributions had not yet kicked in for this individual. She was only 69 and still had a few years to go. Yes, converting her entire traditional IRA before 72 would eliminate the need to take an RMD. But at what cost? For those already taking RMDs, be aware that an RMD cannot be converted. Once satisfied, anything above and beyond the RMD can then be converted.

Financial aid can also be impacted by a Roth conversion, as can other income-based programs and benefits. Before doing any Roth conversion, be sure to weigh all factors, not just market conditions. Every person is different, and we all have personal goals and opinions. An “oops” conversion for one individual could be a home run for another. Tread carefully.

https://www.irahelp.com/slottreport/roth-conversion-%E2%80%93-oops

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

August is winding down and September is just around the corner. That means that it is back to school time! Education can be expensive. This year, with inflation raging, that seems even more true than ever. If you have children looking to further their education, you will need to explore every possible option out there that can help you save. One savings tool that many parents overlook is the Coverdell Education Savings Account (ESA).

Getting Started with an ESA

How can you start an ESA? There is a lot of flexibility here. Unlike other types of tax advantaged savings plans, there is no need for any involvement from an employer. You may establish an ESA with the custodian of your choice. The paperwork you complete is very similar to the paperwork necessary to establish an IRA. When you establish the ESA, you will need to name a responsible individual. The responsible individual controls the ESA, including investment choices and when distributions are taken. Many custodians will allow you, as the contributor, to name yourself as the responsible individual.

Contributions are made to the account to help save for education expenses of a designated beneficiary. The designated beneficiary is a child under the age of 18. Contributions may be made for designated beneficiaries older than 18 if they have special needs. The maximum contribution amount is $2,000 per year for each designated beneficiary, but you may contribute that amount to ESAs for multiple beneficiaries. For example, if you have five grandchildren, you could contribute $2,000 each year to each of their ESAs.

There is no earned income or taxable compensation requirement to contribute to an ESA. There are no age limits either. There are income limits. If your income is above them, you might consider giving the funds to the child or another person with income under the limits and having them make the contribution to avoid those limits. If you are already funding a qualified tuition plan or 529 plan, you can fund an ESA as well. ESA funds are even eligible to be rolled over to qualified tuition plans.

The contribution deadline is generally the tax-filing deadline, April 15. Your ESA contribution is not deductible, but the earnings will be tax-free if the funds are used to pay for qualified education expenses.

Taking ESA Distributions

Qualified distributions from an ESA are tax-free. The definition of qualified education expenses is very broad for ESA purposes. Qualified education expenses include college tuition, room and board as well as required books and supplies. The student can be a full time or part time student. Vocational school or community college expenses are included as well. A student’s computer and internet expenses are also qualified education expenses.

An important benefit of an ESA is that qualified tax-free distributions may be taken for primary and secondary school expenses. You are not limited to expenses after high school graduation. Eligible expenses include tuition, fees, tutoring and special needs services and expenses incurred in connection with enrollment of the designated beneficiary at a public or private school.

If an ESA distribution is not used for education expenses, the earnings portion will be taxable to the designated beneficiary and may be subject to a 10% penalty unless an exception applies. Funds may be rolled over from an ESA to an ESA for a member of the designated beneficiary’s family who is under age 30.

https://www.irahelp.com/slottreport/how-esa-can-help-back-school-expenses

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

Question:

Hi,

My wife (68) inherited a traditional IRA and a Roth from her sister (71) in 2021. Both accounts have been moved to inherited IRAs.

I’m trying to do some tax planning. Can you please confirm the following from my confusing research?

As an “eligible designated beneficiary,” my wife can stretch distributions over her lifetime for both the traditional and Roth IRAs.  RMDs are required starting this year from BOTH inherited accounts using the Single Life Expectancy Table for inherited IRAs.

Yes?  Thanks very much!

Steve

Answer:

Hi Steve,

You are correct. Because your wife was not more than ten years younger than her sister, she is considered an eligible designated beneficiary (EDB). As an EDB, she has the ability to stretch distributions from both the traditional and Roth inherited IRAs over her life expectancy. The annual RMDs would be calculated using the Single Life Expectancy Table, and the first RMDs would need to be taken this year from each inherited IRA.

Question:

I have an IRA at Vanguard and one at American Funds.  Can I aggregate my RMD and take it from just one account even though they are at different companies?

Thanks

Sonny

Answer:

Hi Sonny,

We get a lot of questions on when RMDs can be aggregated and taken from one IRA. In your case, there is no problem. You can aggregate your RMDs and take the total amount due from one of your IRAs. The fact that the IRAs are with different companies does not matter.

https://www.irahelp.com/slottreport/eligible-designated-beneficiaries-and-rmd-aggregation-todays-slott-report-mailbag

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

Here’s a line from one of the manuals we use in our education seminars for advisors: “Missed stretch IRA RMD by an EDB, when the IRA owner dies before the RBD.”

An old baseball expression says: “You can’t tell the players without a scoreboard.” In the world of retirement accounts, you can’t understand the rules without knowing the abbreviated terms. Here’s 18 common ones you should know:

AMBT = Applicable multi-beneficiary trust. A trust named as an IRA beneficiary that enables chronically-ill or disabled EDBs to stretch out RMDs even though there are NEDB trust beneficiaries.

DB = (i) Designated beneficiary. A beneficiary that is a living person. DBs can be either EDBs or NEDBs. (ii) Defined benefit plan. A tax-qualified employer plan in which participants receive a benefit based on the plan’s formula. Also known as a “pension plan.”

DC = Defined contribution plan. A tax-qualified employer plan, like a 401(k) or 403(b), in which participants receive a benefit based on the value of their individual account.

EDB = Eligible designated beneficiary. A DB that is a surviving spouse, a minor child, a chronically ill or disabled individual, or is no more than 10 years younger (or older) than the IRA owner. EDBs can stretch inherited IRAs over their lifetime.

ERISA = The Employee Retirement Income Security Act of 1974. A federal law that regulates certain workplace retirement plans and health plans. Sometimes referred to as “Every Ridiculous Idea Since Adam.”

IRA =  Individual retirement arrangement. (Bet you got this one wrong.) An IRA can be an individual retirement account or an individual retirement annuity.

IRD = Income in respect of the decedent. An income tax deduction available when a beneficiary receives income on an item owned by the decedent (such as an IRA) that is subject to both federal income and estate taxes.

NDB = Non-designated beneficiary. A beneficiary that is not a living person (e.g., a charity, estate or non-qualifying trust). An NDB must be paid out over five years if the IRA owner died before her RBD or over her remaining life expectancy (had she lived) if the owner died on or after her RBD.

NEDB = Non-eligible designated beneficiary. A DB that is not an EDB. NEDBs must be paid out within 10 years and sometimes must receive annual RMDs in years 1-9.

NIA = Net income attributable. Earnings or losses in an IRA attributable to an excess or recharacterized IRA contribution.

NUA = Net unrealized appreciation. A tax strategy for 401(k) or ESOP participants with highly-appreciated company stock to reduce taxes on sale of the stock.

PLR = Private letter ruling. A tax ruling made by the IRS issued upon request of a taxpayer.

QCD = Qualified charitable distribution. A tax-free transfer from an IRA to a charity.

QDRO = Qualified domestic relations order. A court order awarding an ex-spouse  part of an ERISA plan participant’s retirement benefit.

RBD = Required beginning date. The date by which IRA owners and company plan participants must start RMDs. For IRA owners, the RBD is April 1 of the year following the year of their age 72 birthday.

RMD = Required minimum distribution. The minimum distribution that account holders must start taking at their RBD.

SEP = Simplified Employee Pension. A retirement plan in which employers contribute to employees’ IRAs.

SIMPLE = Savings Incentive Match Plan for Employees. A retirement plan for small employers in which elective deferrals and employer contributions are made to employees’ IRAs.

https://www.irahelp.com/slottreport/retirement-account-scorecard

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

Lifetime required minimum distributions (RMDs) start in the year when an IRA owner turns 72. (Technically, the “required beginning date” for RMDs is April 1 of the year after a person turns 72.) Once begun, RMDs must be withdrawn annually on a calendar year basis. If you miss an RMD, the penalty is steep – 50% of the amount not taken.

If a person dies before taking all or part of that year’s RMD, it still must be withdrawn. Death provides no waiver. The responsibility for taking the year-of-death RMD then falls to the beneficiary. It is not paid to the IRA owner’s estate (unless the estate is the named beneficiary) and it cannot be paid to the deceased IRA owner. It is paid, and is taxable, to the beneficiary. Think of it as the final IRA transaction for the deceased owner, and the beneficiary is simply carrying that ultimate matter over the finish line.

While it sounds relatively straightforward, the year-of-death RMD creates all kinds of confusion. Here are three key points to help beneficiaries understand this closing transaction:

1.  Custodians will typically open an inherited IRA for the beneficiary first, transfer all assets to the inherited IRA, and then pay out the year-of-death RMD from the inherited IRA. The Form 1099-R issued for that distribution will include the beneficiary’s social security or tax identification number and will be coded as a death distribution. This payout will be reported on the beneficiary’s personal tax return, NOT the estate’s tax return.

2. If there are multiple IRA beneficiaries, the IRS does not care WHO takes the year-of-death RMD, the IRS just wants it to be taken. If multiple beneficiaries elect to divide the year-of-death RMD equally, they can do so. If one beneficiary chooses a lump sum payout, that could satisfy the entire year-of death RMD (if the lump sum is large enough). Same deal with a charity beneficiary. Charities typically want a lump sum. If the amount is large enough, the payout to the charity can satisfy the full year-of death RMD.

3. The deadline for taking the year-of-death RMD is December 31 of the year of death. If the original IRA owner dies late in the year and had not yet taken his RMD, there is a good chance the year-of-death RMD gets missed. Such situations have been so prevalent that the IRS recently created an extension for missed year-of-death RMDs. There is now an automatic waiver of the 50% penalty if the year-of-death RMD is taken by the beneficiary’s tax filing deadline, including extensions.

Example: Grampa Richie, age 79, has a traditional IRA with his grandson Max, age 25, as beneficiary. Grampa Richie’s annual RMD is normally paid on December 15. However, he dies on December 10, 2022. Grandson Max is responsible for taking the 2022 year-of-death RMD, but in his grief and confusion he misses the year-end deadline. Max is eligible for an automatic waiver of the 50% penalty if he takes the 2022 year-of-death RMD by his 2022 tax filing deadline, plus extensions.

Death is already a difficult and stressful time. Try not to compound issues by mishandling the year-of-death RMD.

https://www.irahelp.com/slottreport/year-death-rmd

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

Question:

When converting an IRA to a Roth IRA, do the investments (stocks, bonds, ETFs, etc.) have to be sold or can they be transferred directly from the IRA into the new Roth account?

Answer:

There is no requirement that investments be sold before a Roth conversion. If the same custodian will be holding the converted funds, the custodian will simply retitle the existing traditional IRA account as a Roth IRA with the same investment portfolio. If it is a partial conversion, the custodian will transfer the appropriate number of shares from the traditional IRA to the Roth IRA. If a new custodian is used, the conversion can usually be done via a direct transfer (also known as a trustee-to-trustee transfer). However, if you hold certain unconventional investments, it’s possible the new custodian won’t accept them.

Question:

Hello,

Can someone, age 70, do a rollover of a 20-year old Roth 401(k) with a former employer to a new Roth IRA without having to start the 5-year clock all over again?

Thanks for any help you can provide.

Mike
Answer:

Dear Mike,

This is a complicated issue. The 5-year clock on the new Roth IRA does have to start over again, but only for determining whether earnings credited after the rollover can come out tax-free. The period that the funds were held in the 401(k) does not carry over to that 5-year clock, so it starts fresh on January 1 of the year the new Roth IRA is established. That’s why it’s important to fund a Roth IRA (even with a small contribution) as early as possible in order to get the Roth IRA clock started. The good news is that the rolled-over funds themselves (both Roth 401(k) contributions and earnings credited before the rollover) can be distributed tax-free at any time after the rollover. That’s because the Roth 401(k) owner in this case was at least 59 ½ at the time of the 401(k) distribution and held the Roth 401(k) for at least 5 years. All of the former Roth 401(k) dollars go into the Roth IRA as essentially one big contribution, and Roth IRA contributions are always immediately available tax- and penalty-free.

https://www.irahelp.com/slottreport/roth-ira-conversions-and-roth-401k-roth-ira-rollovers-today%E2%80%99s-slott-report-mailbag

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

Are you nearing retirement age and not looking forward to taking unwanted required minimum distributions (RMDs) from your retirement account? You may be looking for a strategy to delay those distributions. The “still working” exception allows RMDs to be delayed. Will this exception help you? Here is what you need to know.

The still-working exceptions has some limits. It does not apply to all retirement accounts.  It applies only to company plans. The still-working exception does not apply to IRAs (including SEP and SIMPLE IRAs). If you are still working, that can’t help you delay RMDs from your IRA.

Also, the exception is only available for the plan of the company for which you are still working. If you have other funds in other company plans, it won’t help you with those. Not all plans allow the still working exception. You can’t use the exception if your plan doesn’t allow it. What constitutes still working? Well, there is no official position from IRS on this. There is no requirement that you work 40 hours a week for the exception to apply. A part-time position could be considered still working for purposes of this exception.

You can’t use the exception if you own more than 5% of the company for which you are still working.  When it comes to determining if you are a more than a 5% owner, it’s a family affair. The analysis starts with your personal ownership in the business but does not end there. The Tax Code’s family attribution rules apply. Any ownership in the business by your spouse, child, or grandchild will be included as well when making the call as to whether you are a more than 5% owner.

When you use the still-working exception, RMDs begin in the year you separate from service – even if your last day of work is December 31 of that year. Your required beginning date (RBD) is April 1 of the year after separation from service.

Delaying your RMD using the still-working exception may sound like a good idea, but there are downsides you should consider. You may face restrictions in the plan that would not apply to an IRA. You will begin taking RMDs later, which means you will be taking larger RMDs (due to a higher life expectancy factor). Larger RMDs mean more income taxes, which can result in a tax hit. Your Social Security income could be taxed, and you could lose out on deductions, credits, exemptions and phase-outs.

When considering  the still-working exception, be sure to understand the details.

https://www.irahelp.com/slottreport/what-you-need-know-about-still-working-exception

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

If a retirement account transaction becomes a taxable distribution, you probably know you will owe taxes and possibly the 10% early distribution penalty (if under age 59 ½) on the distribution. But what you may not know is there might be an unexpected surprise. On top of the additional taxes and 10% penalty, you might also be liable for what’s called the “accuracy-related penalty.” Here’s what you need to know about this unpleasant revelation.

The penalty normally kicks in if you substantially underpay your federal income taxes. An underpayment is “substantial” if it is more than the greater of $5,000, or 10% of the tax that was required to be shown on your tax return. (You could also owe the accuracy-related penalty if, in preparing your tax return, you acted negligently or disregarded IRS rules or regulations.) The accuracy-related penalty is normally 20% of the underpayment.

The IRS will waive the penalty if you can show there was “reasonable cause” for the underpayment and that you acted in good faith. The IRS considers reasonable cause on a case-by-case basis, taking into account all pertinent facts and circumstances. However, the IRS says the most important reasonable cause factor is how much of an effort you made to determine your tax liability.

A recent Tax Court case, Lionel E. LaRochelle et al, v. Commissioner; T.C. Summ. Op. 2022-12, illustrates the accuracy-related penalty and the reasonable cause exception. In 2017, Mr. LaRochelle withdrew $238,000 from his IRA, but he and his wife did not show the distribution on their tax return. Since the couple had moved in 2016, Mr. LaRochelle claimed he never received a Form 1099-R from the IRA custodian.

The IRS picked up on his failure to report the $238,000 and assessed additional taxes and the accuracy-related penalty. The LaRochelles paid the taxes but asked the IRS to waive the penalty. After the IRS refused, the case went to the Tax Court.

The couple argued there was reasonable cause for their underpayment because they didn’t receive the 1099-R. But the Tax Court said that failing to receive a tax form reporting a distribution isn’t a good excuse if the taxpayer knew about the distribution anyway. That was the case here. Next, the LaRochelles claimed that they had relied on their tax preparer to produce an accurate tax return, but the court didn’t buy that one either. The court reasoned that, since the couple hadn’t informed the tax preparer about the IRA withdrawal, they could not have expected him to file an accurate return. The $9,075 penalty stood.

The threat of the accuracy-related penalty makes it even more important to know about, and accurately report, all taxable retirement account transactions.

https://www.irahelp.com/slottreport/unpleasant-surprise-accuracy-related-penalty

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

Question:

My husband is the sole beneficiary of a Traditional IRA owned by his cousin, who recently  passed away. From my research, I believe my husband fits the exception criteria of “eligible designated beneficiary” in that he is not more than 10 years younger than the deceased (he is 9 years younger…he is age 72 and the deceased was age 81). As such, from what I read, he does not have to empty the inherited IRA account within 10 years and can withdraw his RMDs using the stretch IRA method. Can you please confirm this?  (I know that for the year of his cousin’s death – 2022 – he needs to take whatever RMD she still needed to take…but after that, it looks like he can stretch his RMDs and does not have to empty the account within 10 years).

Thank you.

Chris

Answer:

Chris,

Excellent detective work! You are correct on all points. Since your husband is not more than 10 years younger than the original account owner (his cousin), then he qualifies as an eligible designated beneficiary and can stretch required minimum distributions (RMDs) over his own single life expectancy. Since the cousin died this year, then RMDs for your husband will begin in 2023 using his own age next year and the applicable factor from the IRS Single Life Expectancy Table. You are also correct that your husband is responsible for taking his cousin’s year-of-death RMD. That needs to be withdrawn before the end of this year.

Question:

Hi there,

Wondering if you have any formula or analysis of determining whether converting some or all of a traditional IRA to Roth is recommended?

Thanks!

Joel

Answer:

Joel,

There is no universal formula for determining whether, or how much, of an IRA should be converted to a Roth IRA. Every situation is different, and there are several factors to consider. For example, do you have available funds to pay the taxes on the conversion? (Preferably these funds would come from a source other than the IRA.) Who is the beneficiary? (If it is all going to charity, then don’t convert.) What do you think future tax rates will be? (If higher, then conversion could be a good idea.) Are you of RMD age? (The RMD must be taken before any conversion, so that will impact taxable income and how much to convert.) Are you subject to IRMAA surcharges? Do you have financial aid based on income? (Both items could be impacted by a conversion.) Before doing any conversion, an independent analysis of that specific situation must be completed before any decision can be made.

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

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

Each week the Ed Slott team answers questions from financial advisors across the country. Sometimes we see a pattern in repeating questions, sometimes the questions are relatively basic, and sometimes they are real stumpers. We never know what the next phone call or email will bring. Recently, we’ve fielded a rash of inherited IRA inquiries. Here are a few:

Can a QCD (qualified charitable distribution) be done from an inherited IRA? For whatever reason, this question came up a few times over the last couple of weeks. The answer is: Yes, a QCD can be done from an inherited IRA. However, the standard QCD rules apply. Meaning, the current owner of the inherited account must be 70 ½ years old or older to qualify. It is not good enough that the previous owner of the IRA was beyond the QCD age. So, if Thomas is 75, dies, and leaves his IRA to his younger siblings Sally, age 73, and John, age 68, only Sally can do a QCD from her inherited IRA. John will have to wait until he is 70 ½.

Can an inherited IRA ever be moved into your own IRA? This is a bit of a trick question. A non-spouse IRA beneficiary can never transfer an inherited IRA into his own IRA. This is true for traditional IRAs and for Roth IRAs. Both must remain as inherited IRAs for non-spouse beneficiaries. However, a spouse beneficiary has more options. A spouse beneficiary CAN transfer an inherited IRA into her own IRA. But under what circumstances would this happen? Wouldn’t a spouse just do a spousal rollover from the very beginning and completely bypass an inherited IRA? Not necessarily. Younger surviving spouses – those under 59 ½ – should consider an inherited IRA before a spousal rollover. An inherited IRA allows the surviving spouse full access to the IRA dollars without the 10% early withdrawal penalty.

Additionally, a surviving spouse has the benefit of not having to take RMDs (required minimum distributions) on the inherited IRA until the deceased spouse would have been age 72. Note that a spousal rollover can be done at any time. So, when the surviving spouse reaches age 59 ½, regardless of how far into the future that is, the inherited IRA can then be moved into her own IRA via a spousal rollover.

Must I consider inherited IRAs for the pro-rata rule? No, inherited IRAs are disregarded for pro-rata. In this case, the account holder wanted to do a Roth conversion. However, he was over 72 and subject to RMDs. Before any conversion could be completed, the RMD had to be taken first. Once that was accomplished, he could proceed with the conversion. But he had after-tax dollars (basis) in his IRA, and the advisor knew that targeting only those after-tax dollars for conversion was not permitted. The pro-rata math had to be done to determine the ratio of after-tax dollars to pre-tax. When doing the calculation, inherited IRAs are always ignored.

If a charity beneficiary takes a lump sum payout, will that satisfy the year-of-death RMD for the remaining living beneficiaries? Yes, assuming the payout to the charity is enough to cover whatever remains of the year-of-death RMD. Ultimately, the IRS does not care which beneficiary takes the year-of-death RMD, it just wants it to be taken. If a payout to a charity beneficiary is enough, then the remaining living beneficiaries are off the hook for the year-of-death RMD and can proceed with their inherited IRAs unencumbered.

https://www.irahelp.com/slottreport/inherited-ira-qas

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

Many Americans are still working long beyond what has traditionally been retirement age. This may be a choice or a necessity. If this is your situation, you may be keeping funds in your employer plan well into your seventies and maybe even later. This can bring big benefits. You can still make contributions to your retirement account, and you may even be able take advantage of the “still-working exception” that allows required minimum distributions (RMDs) to be delayed.

Eventually, however, the time will likely come when you will want to take some or all of the funds out of your plan. You may want to roll over those funds to an IRA. A large percentage of employer plan funds do end up in an IRA eventually. At that time, you will need to pay special attention to your RMD if you have one due for the year. Failing to follow the rules for your RMD can result in adverse tax consequences and penalties.

1. If you have an RMD from the plan for the year, you will need to take that RMD prior to the rollover. It is NOT eligible for rollover to an IRA. It cannot be converted to a Roth IRA. The bottom line is that there is no way around it, you must take it.

2. The first money out of your plan is your RMD if you have one for the year. This is called the “first-money-out-rule,” and many people run afoul of it. You cannot roll part of the funds over now to an IRA and take the RMD later from the plan. You cannot roll over your entire plan balance to your IRA and then take the RMD from the IRA later. If you do either of these, you will wind up with an excess contribution in your IRA. That can mean penalties if it is not corrected on time.

3. Your plan RMD cannot be aggregated with RMDs from your IRA. This means you cannot take it from your IRA. Also, qualified charitable distributions (QCDs) are not available from plans. They are only available from IRAs.

4. Once you have taken your RMD, you may roll over the remainder of your plan funds that are eligible. When the rolled-over funds are deposited to your IRA, they become IRA funds and will be subject to all the IRA rules. There will be no IRA RMD due for the funds rolled over to the IRA for the year of the rollover. However, in years going forward RMDs would be due on these funds, just like any other IRA funds.

Moving your retirement account funds can be tricky. This is especially true when there is an RMD involved. If you have questions about your own situation, your best bet to get it right and avoid costly mistakes is to consult with a financial or tax advisor who is knowledgeable in this specialized area.

https://www.irahelp.com/slottreport/four-things-know-about-your-plan-rollover-and-your-rmd

By Sarah Brenner, JD
Director of Retirement Education

Question:

Can an RMD from an inherited IRA be taken out of your own traditional IRA?

Jack

Answer:

Hi Jack,

Aggregation of required minimum distributions (RMDs) can be complicated and we get a lot of questions on this topic. You can aggregate RMDs and take the total amount from one IRA in some cases. For example, if you have more than one of your own IRAs, you can aggregate your RMDs from each and take the full amount from one IRA. However, you cannot aggregate RMDs from IRAs you inherit with RMDs from IRAs that are your own. You cannot take the RMD from the inherited IRA from your own IRA.

Question:

My wife and I are ages 71 and 69 respectively, retired and not working. Are we eligible to contribute to Roth or traditional IRAs?

Answer:

Age is never a barrier when it comes to IRA contributions. However, there is a requirement that you have taxable compensation or earned income to make an IRA contribution. If you and your spouse are both retired and are not working, you will not be able to make an IRA contribution.

https://www.irahelp.com/slottreport/rmd-aggregation-and-age-requirements-roth-and-traditional-ira-accounts

By Andy Ives, CFP®, AIF®
IRA Analyst

When moving retirement money from IRA to IRA, or from a workplace retirement plan like a 401(k) to an IRA, there are essentially three methods to relocate those dollars. Two of them are similar, and the third opens all kinds of potential problems. Knowing how to properly move retirement dollars is imperative to produce the desired outcome.

Direct Transfer. A direct transfer is the recommended way to move money from one IRA to another. With a direct transfer, (also called a “trustee-to-trustee” transfer), the funds go directly from one IRA custodian to another. Note that if a check is made payable to the new custodian “for the benefit of” (FBO) the account owner, but received by the IRA owner, that will still qualify as a direct transfer.

Example: John has an IRA with Custodian X. He wants to consolidate his accounts with Custodian Z. John requests a direct transfer of his IRA from Custodian X to Custodian Z. John is a bit of a control freak and wants to make sure the transfer is completed, so he asks for the transfer check be mailed to him. Custodian X issues a check made payable to “Custodian Z FBO John, IRA.” This qualifies as a direct transfer, and John hand-delivers the check to Custodian Z.

Direct transfers are not reportable to the IRS. As such, no 1099-R is created for the transaction. Additionally, if an IRA owner is subject to required minimum distributions (RMDs), the entire account, including the RMD, can be directly transferred. There is no need to take an RMD prior to a direct transfer (although it must still be taken by the normal deadline).

Direct Rollover. When retirement dollars move from a work plan like a 401(k) to an IRA, the best option is the direct rollover. (A “direct transfer” is not available with a plan-to-IRA transaction.) A direct rollover is similar to a direct transfer, but with a couple of differences. Primarily, a direct rollover is reportable to the IRS and will generate a 1099-R showing the distribution. When the direct rollover is received by the IRA custodian, the custodian will produce a 5498 confirming the rollover and eliminating any possible taxes due. In addition, if the plan participant is subject to RMDs, the RMD must be taken before the remaining funds are directly rolled over.

Direct rollovers also avoid mandatory 20% withholding if plan dollars were paid directly to a plan participant. Note that there is no mandatory withholding on IRA-to-IRA transactions.

60-Day Rollover. When an IRA owner or plan participant takes a distribution that is paid directly to him, he has 60 days to redeposit all or part of those dollars into the same or similar account. Funds can move from plan-to-IRA and from IRA-to-IRA via 60-day rollover. However, this type of transaction opens numerous opportunities for error. If the funds are not timely rolled over, they will be taxable (and subject to potential penalty). Such distributions from a plan require 20% withholding, and any RMDs included in the distribution cannot be redeposited. Also, a person is only permitted one IRA-to-IRA 60-day rollover per 365-day period. (Note that non-spouse beneficiaries cannot do a 60-day rollover with inherited accounts. Inherited IRAs and work plan assets must be moved by either direct transfer or direct rollover.)

Be sure to understand these methods before requesting any retirement account transaction.

https://www.irahelp.com/slottreport/direct-transfers-direct-rollovers-and-60-day-rollovers

By Ian Berger, JD
IRA Analyst

Question:

I have just read as many questions and answers as I could on The Slott Report and am still very confused.  Simply put, I am over 80 years old, and I have had a Roth and a traditional IRA for many years.  My daughter is the sole beneficiary of those IRAs and is in her 50s. Will my daughter have to take an annual RMD from both my Roth and traditional IRA when she inherits, as well as emptying my accounts within the 10-year period?

Hope you can clear up my confusion.  Thanks.

Chris

Answer:

Hi Chris,

This is a confusing area. Your daughter will have to empty both the Roth and traditional IRAs by the end of the tenth year following your year of death. Under the rules issued by the IRS in February, annual RMDs for years 1-9 of that 10-year period are required if a traditional IRA owner dies on or after his “required beginning date” for RMDs. However, a Roth IRA owner is not subject to RMDs, so he is always considered to have died before his required beginning date. You have already reached your required beginning date. This means your daughter will have to take annual RMDs from your traditional IRA in years 1-9, but not from your Roth IRA.

Question:

Someone participates in a 401(k) through his regular employer and has a solo 401(k) for a side job (self-employed). That person maxed out his 401(k) pre-tax deferrals for 2021 through the regular 401(k) and utilized the remaining limit up to $58,000 for a Mega Backdoor Roth contribution via after-tax contributions. Is he eligible for any solo 401(k) contributions for 2021 (not catch-up eligible)? What am I missing here?

Thank you for any input. I love your newsletters and read them all.

Answer:

We appreciate the compliment! We put a lot of work into The Slott Report and the newsletters.

This person couldn’t make any elective deferrals to the solo 401(k). The elective deferral limit, which takes into account only pre-tax elective deferrals and Roth contributions, applies across both plans, and he already maxed out his deferrals in the regular 401(k). But there is another limit, known as the “annual additions limit” or the “section 415 limit,” that takes into account all employee contributions (including after-tax contributions) and employer contributions. That limit applies separately to each plan if the regular employer and the side business aren’t considered related under the tax rules. If the side business is unrelated to the regular employer, this person could make after-tax contributions (not Roth) or employer contributions to the solo 401(k) even though he has maxed out on his annual additions limit in the regular 401(k).

https://www.irahelp.com/slottreport/beneficiary-rmd-rules-and-401k-contribution-limits-today%E2%80%99s-slott-report-mailbag

By Sarah Brenner, JD
Director of Retirement Education

Back in 2020 when COVID first became our new reality, Congress enacted the CARES Act. The CARES Act allowed qualified individuals who were affected by COVID to take penalty-free distributions from their retirement accounts of up to $100,000. The taxation on these distributions could have been paid in 2020 or spread over three years.

These distributions are called Coronavirus Related Distributions (CRDs) and they were only allowed in 2020. However, CRDs can still be repaid to eligible retirement accounts. Recently, we have received some questions about how repayment of a CRD works. Here is what you should keep in mind if you are considering repaying a CRD.

If you took a CRD, you may repay the withdrawals within three years to a retirement account, tax-free. The three-year period begins on the day after the date the funds were received. You can make one or more repayments during the three years. Repayments cannot exceed the amount that was distributed.

The repayments can be made to any retirement plan to which the original distribution could have been rolled over. Repayment does not have to be made to the account from which the CRD originated. This is an important point to keep in mind because many individuals may no longer have the retirement account from which the CRD came. For example, they may have changed jobs and no longer participate in the plan from which they received the CRD.

The repayment will be considered a direct rollover between a plan and an IRA, and a trustee-to-trustee transfer between IRAs. As such, no taxable event is considered to have occurred when CRDs are repaid, and the once-per-year rollover rule will not apply.

If you recontribute a CRD, you are able to file an amended tax return to recover the taxes paid.

Example: Juan had COVID in 2020 and lost his job. He took a CRD of $100,000 on September 8, 2020, from his 401(k). He elected to pay taxes due on the CRD in 2020 instead of spreading the income over three years. In 2022, Juan has a new job. He decides to repay the CRD to his IRA. He will need to file an amended return to recover the taxes he paid in 2020.

https://www.irahelp.com/slottreport/repaying-crd

By Ian Berger, JD
IRA Analyst

Like most everything else these days, the price for receiving an IRS private letter ruling (PLR) has recently gone up.

A person will request a PLR to receive the IRS’s blessing that a specific tax transaction won’t violate the tax code or IRS regulations. A PLR is specific to the particular tax situation of the person requesting it. This means that PLRs shouldn’t be relied on by anyone other than that person. Practically, however, other taxpayers with similar circumstances often will rely on a published PLR.

There are three problems with requesting a PLR. First, it often takes the IRS a long time – sometimes nine months or longer – to issue a ruling. By that time, it may be too late for the PLR to provide any meaningful relief. Second, PLRs are expensive. As of July 1, 2022, the filing fee alone for requesting a PLR on IRA matters increased from $10,000 to $12,500. And, an attorney or tax expert will charge thousands of dollars more to do the actual filing for you. Lastly, there’s no guarantee that the IRS will rule in your favor.

So, unless you’re faced with a very large tax matter and have the funds to pay the cost, a PLR probably isn’t a good option. Fortunately, with some common retirement account transactions, there are ways to avoid having to go to the IRS for a PLR.

One way is to make sure your IRA or company plan distribution is moved via a direct rollover or transfer rather than a 60-day rollover. With a 60-day rollover, there is always the risk that the deadline will be missed.

If that happens, the IRS will sometimes forgive the violation, but you must request a PLR to get relief. Since 2016, the IRS has also offered self-certification as a free alternative to a PLR for fixing a late rollover. Self-certification only requires you to provide a letter to the receiving custodian indicating that you missed the 60-day deadline due to one of 12 specified reasons. Those reasons include errors by the custodian, losing a rollover check, postal error or serious illness of you or a family member. But self-certification won’t work if you don’t meet one of those 12 reasons. That’s why we always recommend a direct rollover or transfer instead of a 60-day rollover.

A second way to avoid a PLR is to name a person (rather than a trust or estate) as your IRA beneficiary directly on a beneficiary form. Although there are good reasons to name a trust as IRA beneficiary, oftentimes a trust is named without a legitimate purpose. When a trust or estate is designated, it often becomes necessary to request a PLR to allow a surviving spouse to roll over the account owner’s funds to her own IRA or to allow the funds to be transferred to inherited IRAs set up for non-spouse beneficiaries. The need for a PLR in either situation can be avoided by simply naming the beneficiary directly.

https://www.irahelp.com/slottreport/sidestepping-new-irs-private-letter-ruling-fees

By Andy Ives, CFP®, AIF®
IRA Analyst

Question:

Is there a required minimum distribution (RMD) on a self-directed IRA?

Answer:

A “self-directed IRA” is nothing more than an IRA that invests in unconventional items that not all custodians will handle – like maybe crypto currency, real estate, or a hard-to-value assets. Otherwise, self-directed IRAs follow the same rules as every other IRA. As such, yes, self-directed IRAs do have RMDs. So, if you own a commercial property or some other illiquid asset in your self-directed IRA, be proactive and ensure you have some way to take the RMD.

Question:

Ed,

I have enjoyed for years your seminars and newsletter. Last year Congress proposed to end the “Backdoor” Roth strategy. My question on this strategy for this year is, do we implement this with our clients or not? Are you aware of any tax proposals that target eliminating the Backdoor Roth? Or does it look like a safe strategy to employ again in 2022?

Thanks,

Thomas

Answer:

Thomas,

The Backdoor Roth strategy for those who earn too much to contribute to a Roth IRA directly is alive and well in 2022. (The strategy involves contributing non-deductible dollars to a traditional IRA and then converting those dollars to a Roth.) While the Build Back Better bill specifically targeted the strategy, the proposed legislation never made it to law. Should any similar legislation be passed in the second half of this year, we don’t think it would be retroactive for 2022. While Congress did tip its hand and show it is considering elimination of the Backdoor Roth, it is still 100% available for 2022.

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

By Andy Ives, CFP®, AIF®
IRA Analyst

Conduit IRAs, sometimes called “rollover IRAs,” typically contained only money rolled over from a company plan – and subsequent earnings on those dollars. But a 2001 tax law (Economic Growth and Tax Relief Reconciliation Act of 2001) opened all sorts of rollovers and plan portability. So, for the most part, a person could commingle his IRA contributions and rollovers from plans in the same IRA. The result was that, beginning in 2002, conduit IRAs were no longer necessary for most people rolling over plan funds. Yes, conduit IRAs were still necessary for anyone looking to preserve the extremely rare tax break for 10-year averaging, but essentially, conduit IRAs became superfluous.

Nevertheless, people continue to think that a conduit IRA will somehow allow them to dance around certain tax rules or save them when it comes to bankruptcy. Here are a handful of reasons why a conduit IRA is nothing more than an extra statement in the mail, and a couple of reasons why a conduit IRA could still provide some value.

Bankruptcy Protection. ERISA plans – like most 401(k)s – maintain unlimited bankruptcy protection. If you have $10 million in your 401(k) and file for bankruptcy, those plan assets are unavailable to your creditors. If you were to roll over those plan dollars to an IRA, the $10 million would maintain unlimited bankruptcy protection.

An IRA, on the other hand, has only an inflation adjusted cap of bankruptcy protection. This cap currently sits at $1,512,350 and covers your IRA contributions and earnings. Anything over this contributory cap could become available to your bankruptcy creditors. So, should you keep your $10 million rolled over from your 401(k) in a separate IRA – away from your contributory IRA dollars? Not necessary. Commingling is allowed and will not impact the unlimited bankruptcy protection you still have on the former plan dollars. Those former plan dollars remain fully protected, and the $1,512,350 cap is still fully available for your contributory dollars.

After-Tax IRA Dollars/Basis. The Backdoor Roth strategy is alive and well. You can make after-tax (non-deductible) contributions to an IRA and then convert those dollars tax-free to a Roth IRA. However, the pro-rata rule applies. If you have any IRA (or SEP or SIMPLE) with pre-tax dollars, you cannot cherry-pick the after-tax dollars and only covert those. A separate IRA – possibly a conduit IRA where you rolled over your after-tax dollars from a former 401(k) – will not help. Segregating the after-tax from the pre-tax dollars in a different IRA has no bearing on pro-rata, so you might as well commingle.

Reverse Rollovers. Occasionally, employees will leave a job, roll over former plan dollars to an IRA, and then want to roll over those former plan dollars to a new plan at their new job. There is no rule that dictates former plan dollars must be segregated into their own conduit IRA before being rolled back to a new plan. Commingling is perfectly acceptable under the tax code. Now, a specific plan document could have some strange language that dictates that it will only accept former plan dollars via a reverse rollover. In such a case a conduit IRA would be necessary, but this is rare. Additionally, a conduit IRA could help – from an administrative standpoint – so an IRA owner can keep his accounts straight. Regardless, before opening that conduit IRA, ask yourself – is it really necessary?

https://www.irahelp.com/slottreport/conduit-ira-%E2%80%93-it-really-necessary

By Sarah Brenner, JD
Director of Retirement Education

A Qualified Charitable Distribution (QCD) is a way for you to move funds out of your IRA to a qualifying charity income-tax free. If you are thinking this might be a good strategy for you, here are 4 QCD rules that may surprise you.

1. You must be age 70 ½ or older.

IRA owners who are age 70½ and over are eligible to do a QCD. Sounds easy, right? This is more complicated than it might sound. A QCD is only allowed if the distribution is made on or after the date the you actually attain age 70 ½. It is not enough that you will attain that age later in the year.

QCDs are not limited to IRA owners. If you are an IRA beneficiary, you may also do a QCD. All the same rules apply, including the requirement that you must be age 70 ½ or older at the time the QCD is done.

2. Not all retirement accounts funds are available for QCDs

You may take a QCD from your traditional IRAs or your Roth IRA. QCDs are also permitted from SEP and SIMPLE IRAs that are not ongoing. A SEP and SIMPLE plan is ongoing if an employer contribution is made for the plan year ending with or within the calendar year in which the charitable contributions would be made. You may not take a QCDs from your employer plan.

QCDs apply only to taxable amounts. You may not transfer your basis (nondeductible IRA contributions or after-tax rollover funds) to charity as a QCD. QCDs are an exception to the pro-rata rule which usually applies to IRA distributions.

3. There is an annual limit.

QCDs are capped at $100,000 per person, per year. If you are married, you and your spouse can each contribute up to $100,000 from your own IRAs.

If you withdraw more than $100,000 from your IRA to contribute to a charity, you may not carry over the excess to a future year. You can do a QCD with the first $100,000 of the distribution and the remaining amount will be treated as a taxable distribution. You can take a charitable deduction for the amount over $100,000, if you itemize deductions and otherwise qualify for the deduction.

4. A QCD must be done as a direct transfer.

If you want to do a QCD, you must make a direct IRA transfer from the IRA to the charity. You should instruct the IRA custodian to make the distribution check payable to the charity of your choice. If a check that is payable to a charity is sent to you for delivery to the charity, it will be treated as a direct payment. Be careful! If you receive a check payable to you from your IRA and then later give those funds to charity, that is not considered a QCD.

https://www.irahelp.com/slottreport/4-qcd-rules-may-surprise-you

By Ian Berger, JD
IRA Analyst

Proposals to boost IRA and workplace plan savings are advancing, but they are not law yet. Several actions must occur before the proposals become law.

On March 29, the House passed the “Securing a Strong Retirement Act of 2022.” Now, two different Senate committees are taking up the subject. On June 14, a Senate committee (Health, Education, Labor and Pensions) unanimously approved the “Retirement Improvement and Savings Enhancement to Supplement Health Investments for the Nest Egg Act” (the RISE & SHINE Act). The RISE & SHINE Act deals with company plans only.

Today (June 22), a separate Senate committee – the Senate Finance Committee – is taking up its own bill, called the “Enhancing American Retirement Now Act” (EARN Act). The EARN Act deals with both IRAs and company plans. It is similar to, but not the same as, the House-passed bill.

The Senate Finance Committee is expected to pass the EARN Act. If that happens, the EARN Act and the RISE & SHINE Act will likely be combined into one Senate bill. The combined bill will then be taken up by the full Senate. If passed by the full Senate, the Senate bill will have to be reconciled with the House bill and approved by both houses of Congress before being sent to the President.

These bills are often referred to as “SECURE 2.0” because they expand on the original SECURE Act from December 2019.

Here’s how the House-passed bill and the Senate EARN bill compare on several key changes:

• Both bills would increase the age that traditional IRA required minimum distributions (RMDs) must start. Currently, the first RMD year is age 72. The House bill would delay the first RMD year to age 73 beginning in 2023, 74 in 2030 and 75 in 2033. The Senate EARN bill would change the first RMD year to age 75 without interim changes to ages 73 and 74. However, the change to age 75 would not be effective until 2032.
• Both bills would allow higher catch-up contributions to company plans. The current catch-up limit for those age 50 or older is $6,500. Both bills would increase that limit to $10,000 beginning in 2024. The House bill would apply that limit only to those who are age 62, 63 or 64, but the Senate bill would apply it to those who are 60, 61, 62 or 63.
• For IRAs, the current catch-up limit is frozen at $1,000. Both bills would allow that limit to increase based on the cost-of-living. The House bill would be effective in 2024; the Senate bill would be effective in the year following the year the bill is signed into law.
• Both bills require that any plan catch up-contributions for those over age 50 would have to be made as Roth contributions beginning in 2023 (the House bill) or 2024 (the Senate bill). In addition, plans could allow employees to have employer matching contributions made as Roth contributions. (Currently, employer contributions are made pre-tax.) The House bill is effective after the date the bill is signed into law, while the Senate bill is effective in 2024. These changes are designed to help pay for other provisions of the bills.
• In both bills, the limit on “qualified charitable distributions,” which are tax-free direct transfers from traditional IRAs to charities, would be indexed for inflation. That limit is currently $100,000 per person, per year. This provision would be effective in the year the bill is signed into law under the House bill, or the year after the bill is signed into law under the Senate bill.
• Employers would be allowed to make matching contributions to company savings plans and SIMPLE IRAs on student loan payments beginning in 2023 under the House bill or 2024 under the Senate bill.
• In both bills, the “Saver’s Credit,” a federal tax credit for mid- and low-income taxpayers who contribute to an IRA or company plan, would be expanded but not until 2027.
• Both bills create a new exception to the 10% early distribution penalty for IRA and plan withdrawals by victims of domestic abuse. This would be effective immediately after the provision becomes law. The Senate bill (but not the House bill) would create another exception to the 10% penalty for emergency withdrawals beginning in 2024.

We will keep you informed on the progress of these proposals.

https://www.irahelp.com/slottreport/senate-committees-take-retirement-savings-proposals

By Sarah Brenner, JD
Director of Retirement Education

Question:

Dear Sirs:

I inherited a regular IRA upon my mother’s death in 2015. I am now 75 years old and have been taking required distributions since then. She was taking distributions herself when she died.

My question is: may I close out this IRA now by taking out the entire balance and paying taxes on it? Thanks.

Patrick

Answer:

Hi Patrick,

You inherited your mother’s IRA prior to the SECURE Act so you can stretch RMDs from this account over your life expectancy by taking required minimum distributions (RMDs) each year. However, these distributions are only the minimum that needs to be taken out to avoid penalties. You can always take more. If you want to withdraw the entire balance and pay taxes on it this year, there is nothing that prevents this.

Question:

Does the unexpected position of the IRS in the new regulations that non-spouse beneficiaries must take RMDs rather than waiting until the end of the 10-year period to empty the account also apply to an inherited Roth IRA?

Thanks.

Answer:

In the recently released proposed regulations, the IRS took the surprising position that when an IRA owner dies after their required beginning date, annual required minimum distributions (RMDs) are required during the 10-year payout period under the SECURE Act. This rule does not affect Roth IRA beneficiaries who are subject to the 10-year rule because there is no required beginning date for Roth IRA owners. Roth IRA owners do not have to take RMDs during their lifetime, so they are always considered to have died before their required beginning date.

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

By Ian Berger, JD
Director of Retirement Education

Should I Accept a Lump Sum Buyout Offer?

With economic uncertainty increasing, more companies with defined benefit (DB) pension plans will likely attempt to improve their bottom line by offering lump sum buyouts. A lump sum buyout is a limited opportunity for DB plan participants to elect a one-time cash payment in exchange for giving up future periodic payments. Some buyouts are offered to participants who are near retirement age, while others target those already receiving benefits.

Deciding whether to accept a lump sum buyout is an important choice that you shouldn’t make without consulting with a knowledgeable financial advisor. Here are several factors you and your advisor should be looking at:

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. With interest rates rising fast, this may be a good time to seriously consider locking in a lump sum, instead of waiting for a later buyout window to open when rates may be even higher.

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.

These are some of the important issues that should be part of any consideration about accepting a lump sum buyout offer. Remember: Don’t make this crucial decision without getting help from an expert.

https://www.irahelp.com/slottreport/should-i-accept-lump-sum-buyout-offer

By Ian Berger, JD
IRA Analyst

Question:

I am 66 and would like to convert one of my IRAs to a Roth, but I am not sure if any of my old IRA accounts have any after-tax contributions. I have no records, so I assume they are all pre-tax but I am not sure. If I convert and pay taxes, does the IRS contact me regarding after-tax contributions if I ever made them?

Thanks

Mary

Answer:

Hi Mary,

Unfortunately, the IRS will not tell you whether you have any basis on account of making after-tax contributions. Instead, it’s solely up to you to establish that. You indicate that you have no records, but we suggest double-checking to see if you have copies of Form 8606 you may have filed with the IRS to claim basis. Also, you may be able to track down Form 5498 (issued by the IRA custodian to show account contributions) and then match up prior tax returns to see if you took a deduction for the IRA contribution reported on the form. If you can’t prove you have basis, you’ll have to treat all of your IRAs as pre-tax.

Question:

Hello,

We have a client with an RMD of $100,000. We also believe they should do a Roth conversion of $200,000. If they are looking to execute their Roth conversion now while their portfolio is down, can they execute the $200,000 Roth conversion today, then wait to take their RMD of $100,000 in December of this year?

Thanks!

Best Regards,

Josh

Answer:

Hi Josh,

Sorry, that won’t work. When an RMD is due in a particular year, the first dollars distributed from an IRA in that year are treated as the RMD, and RMDs can’t be rolled over. When a person does a conversion, it’s considered both a distribution and a rollover. So, the RMD must be satisfied first. After that, any amount over and above the RMD can then be converted.

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

By Andy Ives, CFP®, AIF®
IRA Analyst

Over the past couple of months I have been tasked with the unfortunate responsibility of helping my mother sort through her financial affairs after the death of her spouse. My dad passed in March, and it has been a steady stream of questions, conference calls with her financial advisor and one important decision after another. Of course, this doesn’t even scratch the surface of the emotional stress and strain on the family.

Thankfully, my parents were prepared. Wills were drafted years ago and recently reviewed with their attorney – a meeting I sat in on. Beneficiary forms were current. Long-term care policies were in place. Decisions had been made a decade earlier about cremation and even what vessel my dad’s ashes would be placed in. Yet despite all this planning, despite their son being a CFP® with 25 years of experience in the financial services industry, it was still a slog.

I explained to my mom how a spousal rollover worked with the IRA accounts. I inquired with the financial advisor about life insurance policies. Other issues included things like: Were my mom’s investment accounts allocated properly? How does Social Security work after the death of a spouse? What items were covered by Medicaid and the long-term care policy? What about my dad’s pension? Joint checking accounts? The final joint tax return? On and on and on.

We are at the three-month anniversary of my dad’s passing, and we are in good shape financially. But we have a village of helpers, a tight-knit family, and broad skillsets that collaborated to coordinate the details. Not everyone has such a safety net…

About a month after my dad died, my teenage son and I went to the local bank to open a checking/savings account for him. He needed a debit card and direct deposit account for his new lifeguard job. As we sat in the little cubicle with the banker clicking away on her computer, I spotted an elderly woman clutching a handful of papers. I watched her sit down with another banker at a neighboring cubicle, and I could hear their conversation over the wall. Her first words were, “My husband died a few months ago, and I don’t know what to do.”

The banker began a series of probing questions, but I could not help but feel a sense of dismay for the widow. She was alone with, apparently, little guidance. How in the world could anyone manage such a daunting task by themselves? And if you have no close friends, relatives or advocates to lean on, I cannot fathom the sickening feeling of helplessness.

I mentioned what I had overheard to the lady who was assisting me and my son. She said it is amazing how many people come into the bank after the death of a spouse who have never written a check, who have never done any planning, who have no idea where to turn. I thought of my mom’s situation and, while almost everything was in order, we still had a gauntlet to run.

What does this lead me to? Please, for the sake of your beneficiaries, get your financial affairs in order. It is never too early to start, and it is the responsible thing to do. Also, make an effort to learn the basics of banking, investing, and financial services in general. And be sure to work with trusted and knowledgeable financial and tax advisors. Even a CFP® like me appreciated the professional handholding while my world was trembling.

https://www.irahelp.com/slottreport/death-spouse-death-dad

By Sarah Brenner
Director of Retirement Education

You may have heard how converting to a Roth IRA is a great move for younger people. This is no surprise. A younger person who converts has two big factors working in her favor. She may pay taxes on a smaller IRA balance, and she has many years to accrue tax-free earnings in her Roth IRA. But what about older people? It is a mistake to write off conversion just due to age. Older individuals should not overlook the potential tax benefits of converting later in life.

Converting Your Traditional IRA

When you convert your traditional IRA to a Roth IRA, your pre-tax traditional IRA funds will be included in your income in the year of the conversion. This will increase your income for the year of the conversion. That may, in turn, impact deductions, credits, exemptions, phase-outs, the taxation of your Social Security benefits and Medicare Part B and Part D premiums; in other words, anything on your tax return impacted by an increase in your income.

That is a tax hit for sure, but keep it in perspective. Remember, the extra income is only for the year of the conversion. The trade-off is the big tax benefit down the road. If you follow the rules for qualified Roth IRA distributions, all your Roth IRA funds, including the earnings, will be tax-free when distributed to you. Not a bad deal!

Three Questions to Ask

Thinking conversion may be the right move for you? No matter how young or old you are, you should ask yourself three questions. First, when will you need the money? Do you need your IRA money immediately for living expenses? If so converting may not be for you. Second, what is your tax rate? If you are retired and your income is lower, that may favor conversion. The third question to ask yourself is whether you have the money to pay the tax on the conversion. It is best to pay the conversion tax from non-IRA funds.

Distributions from your Roth IRA

After you convert, your converted funds can always be distributed from your Roth IRA both tax-and penalty-free if you are over age 59 1/2. However, no matter what your age, you must wait five tax years from the year of your first Roth IRA conversion or contribution to any Roth IRA for a distribution of earnings from any Roth IRA to be tax-free. The good news is that earnings are considered the last funds distributed from your Roth IRA(s) and will never be subject to the 10% early distribution penalty if you are over age 59 ½.

Another plus of converting is the fact that you are not required to take required minimum distributions (RMDs) from your Roth IRA. If you convert your traditional IRA to a Roth IRA, you must take any RMD before converting. However, you will not have to take any more RMDs during your lifetime from your Roth IRA. For those with large IRAs and large RMDs, this could be a big tax savings.

Roth IRA Estate Planning Advantages

A Roth IRA can be a great estate planning tool. You may be thinking that converting is not for you because you don’t want to pay the tax. Don’t forget the big picture. In the short run there will be a tax, but in the long run, your beneficiaries will get the Roth IRA completely tax-free in most cases. Plus, because RMDs are not required during your lifetime, your Roth IRA can sit there growing tax-free for your beneficiaries who will inherit more because of this extra growth.

Roth IRA distributions to your beneficiaries are generally income tax-free, in contrast to traditional IRA distributions to beneficiaries, which are generally taxable. If your beneficiary takes a distribution from the inherited Roth IRA after five tax years from the year of your first Roth IRA conversion or contribution to any Roth IRA, the distribution will be completely income tax and penalty-free.

Should You Convert?

Should every older person with a traditional IRA convert? No, of course not. Conversion is not the best course of action for everyone. However, it should not automatically be off the table for older individuals. Age is just a number. Don’t let it prevent you from exploring if you could benefit from this valuable strategy. Are you a good candidate? The best way to find out is to discuss your situation with a knowledgeable financial or tax advisor.

https://www.irahelp.com/slottreport/too-old-convert-think-again

By Andy Ives, CFP®, AIF®
IRA Analyst

Question:

Hi Ed,

I’m 66 Years old. Less than a year ago I converted into my Roth from my traditional IRA with the intention of parking it there until I could finalize the details of a summer house purchase. I know I have taxes to pay on the conversion. However, now that I wish to use the money and remove it from the Roth, am I going to be subject to a penalty due to a 5-year rule? I was of the understanding that only “earnings” (which for me meant any money earned ON the money I had deposited into the Roth) had to stay in the Roth for 5 years. Does the 5-year rule actually apply to ALL the money I put into the Roth via conversion from the traditional IRA? I have spoken to a few different advisors and have gotten conflicting responses, so I’ve decided to go to the IRA Guru for an accurate, reliable answer.

Thanks Ed!

Sincerely,

Tom

Answer:

Tom,

Since you are over age 59 ½, you couldn’t get a 10% penalty on your IRA even if you wanted one. A person always has access to their Roth IRA contributions tax- and penalty-free, but since you are over age 59 ½, you also have immediate access to all of your Roth IRA conversion dollars tax- and penalty-free. Even if you tapped the earnings, there would not be a penalty. And if you had any Roth IRA for 5 years, those earnings would also be tax-free. If your Roth conversion less than a year ago was your first entry into a Roth IRA, you would have to wait 5 years for the earnings to be tax-free, but the 10% penalty is permanently off the table for you.

Question:

My question relates to multiple types of IRA beneficiaries. If we split the beneficiary designation between a person and a charity, would the person then be subject to the same payout rules as the charity? My understanding is a charity may be required to distribute the IRA within 5 years after the death of the IRA owner. If the other beneficiary is a person, would they also now be subject to the 5-year payout?

Brandon

Answer:

Brandon,

If the beneficiary designation on an IRA is split between a living person and a charity, regardless of the percentage split, the person could potentially be stuck with a shortened payout structure after the death of the IRA owner. However, this would only happen if there was a delay in processing the post-death accounts. After death, you have until December 31 of the year after death to split the account into inherited IRAs or, in this case, to cash out the charity. As long as the charity is timely cashed out after death and the remaining beneficiaries have individual inherited IRAs set up for them before the deadline, they will not be negatively impacted and can follow the payout rules applicable to living people.

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