The Slott Report

Question: If I convert Trad IRA funds to a Roth IRA, does the ratio of After-Tax Contribution to Total IRA holdings include 401k holdings or only IRA holdings.

If you have an IRA, you may have heard the term “required beginning date” or “RBD.” This is an important date that every IRA owner should understand. The significance of the RBD is not limited to IRA owners. It is a critical date for IRA beneficiaries as well. Here are 10 things you need know about the RBD: 1. The RBD for an IRA owner is the date by which the first required minimum distribution (RMD) must be taken. 2. For IRA owners, the RBD is always April 1 of the year following the year they reach age 70 1/2. There is no exception to this rule for IRAs. 3. There are a few exceptions to the April 1 RBD for plan participants. These include the “still working” exception for employer plans and the “old money” exception for 403(b)s. These exceptions do not apply to IRAs.

Question: Hello Ed, I have an elderly client in his 80’s, not in the best of health. He has named his spouse (also in her 80’s) along with his 4 children as primary beneficiaries of his IRA. That said, I know the 4 children will have to establish inherited IRA’s – and keep them in such an account forever, receiving RMD’s at the single life table rate. However, is there some special handling that needs to be done by his spouse (who also has her own IRA and of course is receiving her own RMD’s) – since she is not the sole primary beneficiary listed – or should it just be a straight forward spousal rollover of her portion into her own IRA??? Thank you! Mike Answer: Mike: You have a good understanding of the rules and issues. The key to taking advantage of all the rules is to split the account. Technically, it doesn’t have to be done until December 31st of the year following death, but you could have the client do so now. By splitting the account now, we avoid the post-death deadline, each beneficiary gets to use their own life expectancy for post-death RMDs, and the spouse can execute the spousal rollover (if advisable).

When it comes to 401(k) plans, I feel like the Johnny Cash lyric…“I’ve been everywhere, man.” I’ve wholesaled record keeping platforms to financial advisors and sold direct to business owners. I’ve taught novice investors about their mutual fund options and crawled through the weeds of 401(k) plan design with CPAs. I’ve helped enroll participants, assisted advisors with fund selection, worked for a third party administrator (TPA), and participated in 401(k) plans myself. Despite the popularity of retirement plans, understanding how the core pieces fit together remains a mystery to most. In order to explain the moving parts to those looking to implement a new plan, I fashioned an analogy called: “So You Want to Throw a 401(k) House Party.”

So, you want to invest your IRA money in real estate? Every so often we get this question from advisors wondering what they should look out for. Under the tax code, real estate is a permissible investment for IRAs. However, that doesn’t mean it doesn’t carry its own concerns which should cause you to think twice before jumping in. Below are some things you should take into account before using IRA money to purchase real estate. IRA Custodial Document – Even though the investment is perfectly legal, you need to check the custodial document before making the investment. That’s because IRA custodians can prohibit their accounts from holding real estate. In fact, many do because of the concerns mentioned herein. Thus, investing IRA money in real estate will usually call for a self-directed IRA. Even in this case you still must check the custodial agreement. If your IRA document contains this restriction and you ignore it and invest in real property, you can end up with a taxable event and lose your retirement savings.

Question: Client passed in the middle of December 2018, but did not take her RMD. We are setting up beneficiary IRA accounts. We will be moving assets over to the beneficiary IRA accounts and then the beneficiary will take the RMD distribution. Should they take the 2018 distribution that was due and then take an additional distribution during 2019 based on their life expectancy? Should they do anything to explain the 2018 RMD taken in 2019? Thank You Kathy Answer: Kathy, Based on the wording of your question, I am assuming the beneficiaries of the IRA are non-spouse beneficiaries and are younger than the original account owner. If this is the case, then Step One is to take her RMD for 2018. These funds will be payable to the beneficiaries. Since the 2018 RMD was not taken by December 31 of last year, it will be a missed RMD and potentially subject to a 50% penalty. The beneficiary pays the penalty by filing Form 5329 as an attachment to their federal income tax return.

Not all contributions to IRAs belong there. When a contribution is not permitted in an IRA, it is an excess contribution and needs to be fixed. The bad news is that excess contributions happen easily and often. The good news is that if you properly correct the contribution you can avoid the excess contribution penalty. October 15 Deadline When it comes to the timing of an excess contribution correction, the key deadline is October 15 of the year following the year for which the excess contribution is made. 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 due date for filing the tax return, excluding extensions (October 15 of the year following the year for which the contribution was made). 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 the October 15 deadline.

There are a number of ways an individual can avoid the 10% early withdrawal penalty from their IRA or employer work plan. Some exceptions apply specifically to IRAs (i.e. higher education; first-time home buyer, etc.) and others pertain only to company plans (for example, the age-55 exception and qualified domestic relations orders, among others). As long as the account holder meets the definition of the exception and files proper paperwork, the IRS will allow penalty free-withdrawals. While death is the most severe, there is another exception that applies to both IRAs and company plans that seems to loom over all others: Disability. Whether or not someone is disabled is highly subjective. However, when it comes to avoiding the 10% early withdrawal penalty by claiming the disability exception, the definition is strict, and it is clear.

Question: Hi I have a question about 72t "If" I am 45 years old, and calculate the amount to withdraw from my ira under 72t via the RMD method, I understand that I must continue calculating the withdrawal via the RMD method every year until I am 59 1/2 years old. But Now what??? My question is- once I am 59 1/2, can I stop withdrawing from my ira even though I had started taking RMDs since the age of 45 (under the 72t plan) And then start taking RMDs again at 72 years old? Or if I start taking RMDs at 45, once I start taking RMDs, I can't stop taking yearly RMDs until I am dead? If you could clarify if I have an option at 59 1/2 years old, or not, I would really appreciate it.

Mistakes happen, and when dealing with complicated rules like the U.S. tax code, they aren’t exactly uncommon. Thankfully, the IRS has numerous ways various mistakes can be corrected, and one of the most lenient processes is for missed required minimum distributions (“RMDs”). To say that the missed RMD penalty is stiff (i.e., 50% of the missed amount) is a gross understatement. If you don’t ask for relief in the right manner, the IRS can impose the penalty and interest on the missed amount. Therefore, knowing how to ask for relief for this type of mistake is more important than ever. Missed RMDs can happen under a variety of circumstances, but the most common are misinformed non-spouse beneficiaries and IRA owners who simply misunderstand the rules and are poorly advised. Most non-spouse beneficiaries are unaware that the first RMD must be issued by December 31st of the year after the IRA owner dies. And sadly, while some are told this shortly after the IRA owner’s death, few custodians will follow-up to make sure the distribution was in fact made.