Top 10 IRA “Popular Confusions” | Ed Slott and Company, LLC

Top 10 IRA “Popular Confusions”

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


The Ed Slott team answers thousands of IRA and work plan questions annually - emails, phone calls, in-person conversations, webinars, Q&A programs and texts. We accommodate all members of the Ed Slott Elite Advisor Group, work with non-member advisors at our 2-Day training programs, and answer questions from the general public via our weekly mailbag. Over time, certain inquiries repeat themselves. I call these “popular confusions.” Here are 10 IRA and work plan topics that you may have stumbled across yourself:


10. QCDs (Qualified Charitable Distributions). You can do a QCD for more than the RMD (required minimum distribution) for that year, but you can’t take a distribution and then retroactively “deem” it to be a QCD. Also, if you already took your RMD, you can still do a QCD. It is just an additional distribution over and above what you already took.

9. Participation in multiple work plans – like a 401(k) and a SIMPLE. Yes, you can max out multiple work plans if you work at different companies, but you are bound by the annual elective deferral limits, aggregated across all plans.

8. Phase-out rules for IRA deductibility. Even if you make a million-dollar salary, you can still potentially deduct an IRA contribution. It depends if you are “covered” by a work plan or not.

7. Rolling a Roth 401(k) into a Roth IRA. So many variables. How old are you? How long have you had the Roth 401(k)? Do you have a Roth IRA? When was that Roth IRA started?

6. Inherited Roth IRAs – Do annual RMDs apply or not? An eligible designated beneficiary (EDB) can take stretch RMD payments from an inherited Roth IRA. However, a non-EDB of a Roth IRA will NOT have RMDs within the 10-year rule.

5. Pro-rata rule/Backdoor Roth. Holy cow, does this confuse people! You cannot cherry-pick just the after-tax dollars in your IRA and only convert those. The IRS looks at all your IRAs, SEPs and SIMPLE plans as one big bucket of money. The ratio of after-tax vs. pre-tax determines the taxability of the conversion…and you are not paying “double tax.”

4. The “Not-more-than-10-years-younger” EDB category. This group is often completely overlooked. Anyone in the world who is not more than 10 years younger than you qualifies as an EDB on your IRA. There does not need to be any family relationship.

3. Roth IRA distribution ordering rules. Contributions come out first, converted dollars come out second, earnings come out last. End of story. There is no FIFO, LIFO, or fe-fi-fo-fum.

2. Rules when a trust or estate is named as IRA beneficiary. Where to begin? The trust or estate is the IRA beneficiary. You do not get to automatically set up inherited IRAs for the trust or estate beneficiaries – although the custodian may allow it based on previous private letter rulings. (And I am afraid to even mention the possibility of the “ghost rule” payout!)

And the number one most popular confusion…

1. Roth 5-year clocks. We could host a half-day webinar on this topic alone. There are two Roth IRA 5-year clocks to consider, and the nuances of different payout situations are infinite.


Content Citation Guidelines

Below is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. The verbiage must be used any time you take text from a piece and put it onto your own letterhead, within your newsletter, on your website, etc. Verbiage varies based on where you’re taking the content from.

Please be advised that prior to distributing re-branded content, you must send a proof to [email protected] for approval.

For white papers/other outflow pieces:
Copyright © [year of publication], [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] Reprinted with permission [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] takes no responsibility for the current accuracy of this information.

For charts:
Copyright © [year of publication], Ed Slott and Company, LLC Reprinted with permission Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.

For Slott Report articles:
Copyright © [year of article], Ed Slott and Company, LLC Reprinted from The Slott Report, [insert date of article], with permission. [Insert article URL] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.

Please contact Matt Smith at [email protected] or (516) 536-8282 with any questions.

 

Find members of Ed Slott's Elite IRA Advisor GroupSM in your area.
We neither keep nor share your information entered on this form.
 

I agree to the terms and services:

You may review the terms and conditions here.