The Slott Report

First, thank you for the educational opportunity via the mailbag services. I'm 70 years old (will be 70 1/2 in July this year). I retired in 2014. I have a 401K account (consisting of highly appreciated stocks and cash) with my former employer. Although the majority of the money is pre-taxed, I do have a small portion of the money in in-plan Roth which was established in 2016. Not knowing the NUA advantage, I made several withdrawals and Roth conversions between 2015 - 2017. From reading the NUA rules, I thought I had lost the NUA privilege for good. However, when I call the saving account administrator, they said that since I have not made any withdrawals in 2018, I still qualify for the NUA treatment this year. This is conflicting information to my understanding.

If the dictionary had pictures next to each word, the U.S. Tax Code would fit nicely next to the definition of “esoteric.” But as we all know, this complex web of rules and regulations cannot be ignored. Mistakes cost money, in the form of extra taxes, penalties, and interest. Some mistakes can be fixed, but not all. Even those that can be fixed may incur IRS user fees or, at the least, professional costs to unwind the transaction. To avoid the consequences, you must clearly understand all the applicable rules. There’s an old saying: “close only counts with horseshoes and hand grenades.” That is indeed the case when it comes to complying with the tax code. So, while there are literally hundreds of mistakes someone could make with retirement plan money, I wanted to highlight some of the more common ones (not in any particular order).

Today is April 15, 2019. This is deadline for filing your 2018 federal income tax return, unless you have an extension. This tax season was the first one where we saw the impact of the Tax Cuts and Jobs Act. Wholesale changes to the tax code made this a more interesting and unpredictable tax season than usual. Many taxpayers had lots of uncertainty about what tax reform would mean for their 2018 federal income tax returns. As we reach the tax-filing deadline, here are two IRA lessons we learned this tax season:

Question: Hello, I have a question for a situation I have never come across before. I have a client that just found out they missed taking their RMD’s from one of their retirement accounts for the last 5 years! Assuming they take the missed distributions in March 2019, what form will the broker report this on? Will it be a Form 1099-R for 2019? Or will he get a corrected Form 1099-R for 2015, 2016, 2017…? Also, what code will be used in box 7 to indicate that this is a correction of the missed RMD’s? Thank you for any help you can give! Regards, Deborah Answer: Deborah, Missing RMDs is a common occurrence and there is a definitive fix. The missed RMD should be taken as soon as possible. The RMD will be taxable in the year it is withdrawn, so the missed RMDs will all be included on the 2019 Form 1099-R.

Unfortunately, it happened again. Another person dove into the IRA rollover pool before checking the depth, temperature, or if the pool was even open for swimming. In this scenario, $125,000 was rolled from an IRA at Bank A to Bank B. A few months later, in a constant search for a higher paying certificate of deposit, the account owner rolled the same $125,000 to an IRA at Bank C. Spot the problem(s)? This relatively innocuous-looking transaction created a laundry list of snowballing issues. Probably the most penal is that the second rollover attempt was invalid and is treated as a distribution. The $125,000 is now taxable earned income for the year. Why? A person is permitted only one (1) 60-day rollover per 12-month period with their IRA accounts. This does NOT mean one rollover per calendar year.

Most people are aware of the tax concept, Required Minimum Distributions or “RMDs.” These are the tax rules that force you to take a distribution from your IRA or qualified plan, even when you don’t want to. Moreover, that distribution is usually taxable, and it cannot be rolled over! The calculation is always the same: you divide the account balance as of December 31st of the previous year (adjusted for any outstanding rollovers and transfers) by the appropriate life expectancy factor. What often confuses people are the starting points and the applicable expectancy factor. Use the checklist below to keep some of these rules straight: IRA Owner: RMDs must be made by April 1st following the year you reach age 70 ½. After that initial distribution, the deadline shifts. You still receive an RMD, but it must be made by December 31st. Because of this, waiting until the April 1st deadline means while you pay taxes on two RMDs in the same year.

Question: I have a 60 day rollover, and basically the client has what I believe is an uneducated tax preparer. The roll over occurred within the proper 60 days, the custodian sent out the 1099R as a distribution checking box 7, 1, because even they sent the check directly to the new custodian they did not receive a letter of acceptance, so they considered it a distribution. I explained to the tax preparer he needs to complete a 1040 now, and by the end of May the client will receive a 5498 form from the new custodian reflecting a 60 day rollover occurred. The tax preparer says I am mistaken it is taxable now because he has a 1099 form saying it is. Did I not explain this correctly? Thank you Stewart Answer: Hi Stewart, This is an area where we see a lot of confusion during tax season. You are correct. A 60-day rollover must be handled on the tax return by the taxpayer.

Are you a small business owner or a sole proprietor? If so, you may use a Simplified Employee Pension (SEP) IRA plan to save for retirement. These plans are a popular choice for small businesses because they are inexpensive and easier to administer than other retirement plans. While SEPs are pretty straight forward, there are some rules that may surprise you How a SEP Works Contributions, which are tax-deductible for the business or individual, go into a traditional IRA established by the employee. Only the employer can make SEP contributions. Employees do not make SEP contributions.

A little house on Easy Street has one front door. It is a traditional IRA. There is a sign above the lone entry point the reads, “To All Those That Enter, Thy Earnings Will be Taxable.” It does not matter if the money that enters through the front door is a contribution or rollover or transfer. Most of the arriving dollars, and all of the earnings on those dollars, will be taxable when they leave. (Some money that passes through the front door of the traditional IRA house will receive a special wristband the reads “BASIS” and it will not be taxable upon departure. However, those “Basis” visitors will still enter through the single door beneath the “Earnings Will be Taxable” sign.) Every traditional IRA home can be decorated differently. This particular traditional IRA house has an ETF sofa, an individual stock leather chair, and a couple of mutual fund recliners. The traditional IRA across the street might have four ETF sofas, or the living room may well be adorned with a dozen mutual fund folding chairs.

Question: Planning Question - for retirement plans that permit Non Roth After Tax Contributions, could the company use Qualified Matching Contributions (QMACs) for the NHCEs to satisfy the ADP & ACP testing allowing the HCEs to max out their 415(c) ceiling above their own deferrals and company match contribution? Or, is there a better way for the HCEs to max out up to the 415(c) ceiling? Rick Answer: Rick, Qualified Matching Contributions, or “QMACs,” are used to help plans pass the Actual Contributions Percentage Test (ACP). Since after-tax contributions are included in the ACP Test, QMACs can be used to help plans pass