The Slott Report

I’m sure you’ve heard countless advisors mention that a direct transfer (or direct rollover) is the best way to move funds between IRAs or qualified retirement plans. But do you understand why? There are a number of reasons, and in this installment, we discuss some of those in greater depth. Background: Direct Transfer vs. 60-day Rollovers It is important to under the difference between a direct transfer (or direct rollover) and it’s alternative, a 60-day rollover (or indirect rollover). Direct Transfer – A direct transfer and a direct rollover have identical meanings. The only difference is the tax code uses the term “direct transfer” when discussing IRAs and “direct rollovers” when addressing qualified plans. In either event, we are talking about a distribution where the funds are payable to another tax-deferred account. They are not paid to the account holder. There are two ways to directly transfer/rollover IRA and qualified plan accounts:

Question: I have a question about avoiding RMDs for a still-working 72 year old in a 401k plan. Suppose they don’t have to take 401k RMDs due to the still-working exemption from RMDs. Let’s say the person knows they will retire next year in February 2020 when they will be 73. If they do an IRA rollover while still employed in January 2020, would that avoid the RMD for the 401k plan? Is it correct to assume that the rollover amount from the 401k would not be included in the IRA RMD calculation for 2019, but would be included for 2020 (since 401k amount was not in IRA at end-2018, it would not be included in calculation)?

It’s that time of year again. Tax season is upon us. This is now the time when many individuals consider funding their IRAs. Contributing to an IRA may seem pretty straight forward and in many ways it is! But there can be twists. Here are five IRA contribution rules that may surprise you. 1. File now and fund later. Frequently, during tax season we are asked if an IRA contribution must be made before the tax return is filed. The answer is no. This is not required. You can claim a deduction for your IRA contribution now when you file your taxes and fund it later. Some people even fund their IRA contribution with their tax refund if the timing is right. Just don’t wait too long. If you claim the contribution, be sure you get it done.

A disclaimer is an interesting tool. It is a denial or disavowal of legal claim, or a formal refusal to accept an interest in something. “Release” and “waiver” are good synonyms. Oftentimes a disclaimer statement is used by a person looking to shield themselves from legal repercussions. A shady politician might disclaim any responsibility or liability from the things he “may or may not have said.” It would be nice if we could disclaim the bad things in life, like a stubbed toe or a failing grade in math class. Disclaimers are not just for people looking to cover their tails. They can certainly be used for the benefit of others, especially with retirement plans. For example: a husband dies but neglects to name a beneficiary on his IRA account.

Question: My Daughter is a 30-year old RN and I want to help her contribute to an IRA. She has a 401K at the hospital where she works, but she only contributes to maximize their 4% matching. It is my understanding she can still contribute (up until April 15th, 2019) $5,500 to either a 2018 ROTH or a 2018 traditional IRA. At her age, the growth on an IRA over time should be huge. Would a ROTH always be a better IRA to put her $5,500 and forgo the reduction on her taxable income from the traditional IRA? Thanks! Ted Answer: Ted, I completely agree with everything you’ve said. Your daughter should continue to contribute to her employer at least up to the amount necessary to get the maximum matching contribution.

When a legal question is clear, I like to imagine the landscape like the great plains of the midwestern United States. The land is flat and lush, meaning problems are easily identified and the area can be easily traversed. On the other hand, when the question isn’t so clear, the terrain reminds me of the moon; rocky, dark, desolate, and full of potholes and craters. Naturally, we hope that every legal issue we encounter is like the rolling plains of the breadbasket of America. Unfortunately, that is not always the case. And such is the situation when it comes to the protection of inherited IRAs in bankruptcy court.

Much attention is paid to the favorable options available when spouses are named as IRA beneficiaries. However, a significant portion of IRA assets will end up being inherited by individuals who are not a spouse of the decedent. Many people name siblings, friends, children or others as their IRA beneficiaries. Also, IRA assets that start off with spouse beneficiaries often end up in the hands of non-spouse beneficiaries. How so? A typical scenario is for spouses to name each other as IRA beneficiaries. After the death of first spouse, the surviving spouse will often transfer the inherited IRA assets to an IRA in their own name. At that point they are likely to name a non-spouse beneficiary if they do not remarry. Because IRA assets frequently wind up being inherited by someone other than a spouse, it is critical to understand both the possibilities and pitfalls for these non-spouse beneficiaries. When an IRA owner dies, there is no probate or other process necessary to transfer the IRA funds to the beneficiary named on the beneficiary designation form. Instead, the IRA becomes the beneficiary’s property by the fact of the IRA owner’s death. Generally, the beneficiary will provide a death certificate to the IRA custodian. The account will then be retitled as a

Question: Hello, I am a CPA and was not sure if in 2019 alimony was considered earned income for making a Roth IRA contribution. Would appreciate any clarification you can provide. Thank you very much. Have a great day! Dale Answer: Dale, This issue was one of the changes enacted under the Tax Cuts and Jobs Act. Under the old law, alimony was taxable to the recipient. That means it would be considered earned income and therefore able to be used in making a Roth IRA contribution.

Ivan is an inventor at heart, but he is stuck in an office at a job he does not particularly care for. Ivan constantly daydreams about starting his own company and improving everyday life with his inventions. For 20 years Ivan funds his 401(k) and tinkers with his creations when he gets home from work. With a burst of inspiration, Ivan invents the widget. He thinks the widget will transform the world. At age 50, Ivan strongly considers quitting his job and starting his own business. However, he needs capital to market and mass-produce the widget. Ivan’s only savings is his 401(k) at the job he doesn’t enjoy. Ivan could roll the 401(k) into an IRA and take a withdrawal, but this would result in taxes and a 10% penalty because Ivan is under 59 ½.

Question: In 2017, I opened a Roth IRA through my company. Being over 65, I mistakenly thought I could convert Traditional IRA funds to the Roth if I paid tax on the rollover amount. In August 2018, I had Schwab roll $50,000 into my Roth from my traditional IRA. This month (February 2019) when doing my 2018 taxes, I realized that conversions are not allowed in 2018, and withdrawals are not allowed from a Roth younger than 5 years old. What are my options for undoing this situation without paying a 6% yearly penalty? I am prepared to pay income tax on the amount. Thank You Chris Answer: Chris, Assuming I understand your terminology, I think I have some good news for you! First, you did NOT make a mistake. Converting Traditional IRA funds to a Roth IRA is certainly still allowed and is a great estate planning tool for the right people.