The Slott Report | Ed Slott and Company, LLC

The Slott Report

ROTH IRA WITHDRAWALS AND COMPANY PLAN LIMITS: TODAY’S SLOTT REPORT MAILBAG

Question: I am 72 years old and converting my traditional IRA to a Roth IRA a little at a time each year. Do I need to concern myself with a 5-year rule for earnings if I were to withdraw ALL my Roth IRA at once? If I do have to address that issue, is there a way to track earnings for newly converted funds? Regards, Marc Answer: Hi Marc, Whether you need to be concerned about the 5-year rule depends on when your first Roth contribution was made or your first conversion was done. The 5-year clock for tax-free Roth earnings starts ticking on January 1 of the year of your first Roth contribution or conversion.

VESTING RULES FOR COMPANY PLANS

If you’re thinking about leaving your job, you may want to inquire about your company retirement plan’s vesting schedule. If you are close to becoming vested in a retirement benefit, it may pay to stick it out until you have enough service to become vested. Otherwise, you may lose out on a valuable benefit. Being fully vested in your benefit means that you have earned a benefit that cannot be taken away from you. If you are partially vested, you will receive only a portion of your benefit. If you are 0% vested, you will receive no benefit at all. The unvested portion of your benefit will be forfeited in the case of a partially-vested or 0%-vested benefit.

The 5-Year Forever Clock

Buckle your seatbelt and hang on to your hat. This ride could get bumpy. We are about to embark on a conversation that might give some readers vertigo or whiplash or all of the above. An article I wrote about the two 5-year clocks for Roth IRA conversions and earnings remains a popular education piece (“Roth IRA: 2 Clocks,” May 13, 2019). However, based on a steady stream of questions and continued confusion, I am compelled to expand on the topic. This new article is NOT about the 5-year clock that allows penalty-free distributions from Roth conversions for those under 59 ½. That 5-year clock will restart for each conversion that is done for anyone under 59 ½. Here we discuss something I have begun referring to as… [insert dramatic music here] …the “Roth 5-Year Forever Clock.”

IRAs in a Divorce and Roth Conversions: Today's Slott Report Mailbag

Question: I have a question about an IRA split between my husband and me. I got half of his retirement IRA and I was wondering if I am responsible for the taxes if I was to withdraw the funds. Also, if I didn't want all the funds in the account before I opened it, could I tell the custodian to give me a portion and put the rest in? If I could, would I be charged a penalty of 10%? Thank you Answer: Handling an IRA in a divorce can be complicated. If you are awarded part of you ex-spouse’s IRA, the correct way to proceed is to directly transfer the IRA funds to an IRA in your name. This is a non-taxable transaction.

Seven Things to Know about Spousal IRA Contributions

Many individuals find themselves stepping away from a job for reasons such as raising children or being a caregiver to aging parents. When this happens retirement savings can take a hit. That does not necessarily need to be case. You may be able to continue to save with an IRA. If you are married you may be able to make a contribution to your IRA based on your spouse’s taxable compensation for the year. These IRA contributions are called “spousal IRA contributions.” Here are seven things to know about spousal contributions: You make your IRA contribution using your spouse’s compensation. Your spouse can still contribute to an IRA, too. In fact, if your spouse has $14,000 in taxable compensation for the year, you can both contribute $6,000 to your IRAs for 2019, plus an additional $1,000 each if you are both over the age-50 catch-up limit.

ALL ABOUT ERISA

Contrary to urban legend, ERISA does not stand for “Every Ridiculous Idea Since Adam.” Instead, it is an acronym for the Employee Retirement Income Security Act of 1974. ERISA is a federal law that regulates employer-sponsored retirement plans and health plans. (ERISA does not cover IRAs because they are not sponsored by an employer.) For retirement plans, ERISA imposes certain requirements on the sponsoring employer and other plan officials. These requirements include: Filing annual reports with the IRS; Providing certain communications to plan participants, including a plan summary (called a “summary plan description”); Complying with certain standards for eligibility, vesting and plan funding;

Beneficiary Forms and Roth Conversions: Today's Slott Report Mailbag

Question: Hello, I was wondering, will incorrect information on a Beneficiary Designation form cause it to be invalid? I see forms with a wrong or missing date of birth, or ones listing more than one beneficiary, each assigned 100%. Thanks, Susan Answer: Susan, An error on a beneficiary form could certainly invalidate it. However, it is ultimately up to the custodian to determine if a beneficiary form is acceptable or not as it depends on the magnitude of the error. Of course, the last thing anyone wants to deal with during this time is questions about who the beneficiaries are on an account. Even if the custodian does accept a form with apparent mistakes, there could still be a legal battle if someone felt disinherited. If you see a form with errors, the best course of action is to have a new form completed properly, dated and signed.

Carry the Box

My wife teaches elementary school kids. Been at it for years. Long enough to have former students visit her classroom as adults. She was put on this Earth to teach. Tough job, though. Even at this early age, and oftentimes through no fault of their own, students headed down a rugged path to a hard life are already identifiable. Broken families, financial problems, emotional and developmental issues, learning difficulties. Kids desperate for help. A good teacher will push and pull and inspire and challenge and guide every student to the finish line. In my mind, a child’s education is a large wooden crate, constantly being filled with knowledge and experiences. This box needs to be carried from kindergarten through college, but no child can carry their box alone.

Three Things to Know About the Year of Death RMD

There are always questions that come up as to the correct way to handle the required minimum distribution (RMD) for the year of death of the IRA owner. Here are three things you need to know about the year of death RMD. 1. The RMD for the year of death will only need to be taken if the IRA owner died after his required beginning date. The required beginning date for IRAs is April 1 of the year following the year the IRA owner reaches age 70 ½. If the IRA owner dies before this date, there is no RMD required for the year of death. This is true even if the IRA owner is already age 70 ½ and even though he has already taken part of the RMD.

RMD RULES AND THE SEPARATION FROM SERVICE EXCEPTION: TODAY'S SLOTT REPORT MAILBAG

Question: I turn 70 ½ this year and my last day of work was September 30, 2019. Am I required to take an RMD from my work profit sharing 401(k) plan by April of 2020 and, if so, is the RMD calculated on the 12/31/18 account balance? My employer will roll my profit sharing 401(k) into my IRA on January 2, 2020. Thank you for your help.
 

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