The Slott Report | Ed Slott and Company, LLC

The Slott Report

How the New SECURE Rule Eliminating the Age Restriction on Traditional IRAs Works

The SECURE Act eliminated the age restriction on contributions to traditional IRAs. The rule outlawing contributions for those 70 ½ or older is no more. This is good news for older IRA owners who are still working or have a spouse who is. Now, traditional IRAs have joined Roth IRAs as available options for eligible savers of all ages. This new rule may seem straightforward, but we have been getting some questions about who is eligible and when it is effective. Making Contributions and Taking RMDs One area of confusion for some IRA owners is how the new rule eliminating the age limit for traditional IRA contributions works with another new rule in the SECURE Act, the rule raising the RMD age to 72. IRA owners who reached age 70 ½ in 2019 cannot take advantage of the new ruling delaying RMDs until age 72.

QCDs and the 10-Year Rule: Today's Slott Report Mailbag

Question: My dad was 86 when he died and I inherited half of his IRA, which I elected to stretch. Am I correct in thinking that since I am not yet 70 ½, I am not allowed to direct qualified charitable distributions (QCDs) from this IRA? Please advise. Thanks, Ron. Answer: Hi Ron, You are correct. Beneficiaries can do QCDs, but to be eligible the beneficiary must be age 70 ½. If you have not yet reached that age, you may not do a QCD.

RMD Trivia

True or False? “It is mathematically impossible for an IRA account owner to have his first required minimum distribution (RMD) be due for the year 2020.” Here’s why this statement is true. First, we are not talking about inherited IRAs. If the account owner died in 2019, then the first RMD for the beneficiary needs to be taken by December 31, 2020. Inherited IRAs do not fit this statement. Next, we are not talking about workplace retirement plans – like a 401(k). The reason this statement does not apply to a 401(k) is because of the pesky “still-working” exception. If a plan has the still-working exception feature and an older employee separates from service in calendar year 2020, then the first RMD will also be due for 2020.

SEVEN Q&As ABOUT COMPANY PLAN LOANS

Who can offer them? Most company retirement savings plans, such as 401(k), 403(b) and 457(b) plans, are allowed to (but not required to) offer plan loans. Loans are not allowed from IRAs or SEP and SIMPLE-IRA plans. What is the maximum amount I can borrow? Plan loans are generally limited to the lesser of 50% of your vested account balance, or $50,000. Your employer can allow an exception to this rule: If 50% of your vested account balance is less than $10,000, you can still borrow up to $10,000. Example 1: Justin participates in a 401(k) plan that allows plan loans. Justin’s vested account balance is $16,000. If his plan doesn’t allow the exception, the most Justin can borrow is $8,000. If the plan allows the exception, he can borrow up to $10,000.

Inherited IRAs: Today's Slott Report Mailbag

Question: Looking for your help. Husband has an inherited IRA (from his dad prior to the SECURE Act) and was taking RMDs using the single life table. Husband passes away in 2020 and leaves the inherited IRA to his wife who is age 65. What are the wife’s options for distribution? Thanks, Travis Answer: Travis, Under the SECURE Act, if a beneficiary owner of an inherited IRA dies in 2020 (or later), the next beneficiary in line (the successor beneficiary) is bound by the 10-year payout rule. Even if the successor beneficiary would otherwise be allowed to stretch payments as an eligible designated beneficiary (i.e., spouse, disabled individual, etc.), that person is still saddled with the 10-year rule.

10 Things to Know about the SECURE Act’s 10-Year Rule

The SECURE Act overhauled the rules for beneficiaries of retirement accounts. One significant change it brought is the new 10-year payout rule. Here are ten things you need to know about the new 10-year rule. 1. The 10-year rule applies to most nonspouse beneficiaries when the account owner dies in 2020 or later. The bottom line with the SECURE Act is that very few nonspouse beneficiaries will escape the 10-year rule. While the new law does carve out some exceptions such as disabled or chronically ill individuals, most beneficiaries who used to be able to stretch out distributions over their lifetime will end up with the 10-year rule.

Careful Considerations: Spousal Rollover or Inherited IRA?

A spouse beneficiary of an IRA faces many decisions. There is great flexibility and many items to consider. For example, how old was my spouse when he or she passed and what impact will that have on my available choices? Do I need money now? How can I minimize my tax burden? Will penalties apply if I withdraw from the account? By systematically considering each question and leveraging the rules, a spouse beneficiary can create a unique plan that fits his or her needs. After all, with the loss of a spouse, the last thing anyone wants to deal with is money problems derived from poor planning. Example 1: Married couple John and Janet are both 55 years old. John dies and leaves his traditional IRA to Janet. Janet will need immediate access to the account to cover living expenses. Based on these facts, the decision is clear.

BACK DOOR CONVERSIONS AND GRANDCHILDREN UNDER THE SECURE ACT: TODAY’S SLOTT REPORT MAILBAG

Question: For the last three years, I have done a back door Roth conversion. I do the conversion in January. I am 68 years old and I am rolling over my 457(b) New York City deferred compensation plan funds to a rollover IRA with Vanguard. They will get the money around April 1, 2020. Will there be a tax penalty for the 2020 Roth conversion? Answer: When you do a back door Roth conversion, the pro-rata rule applies if you have pre-tax funds in any of your IRAs. In that case, a portion of your conversion will be considered taxable based on the ratio of your pre-tax IRA funds to the sum of all of your IRA funds.

TAX RULES FOR DIFFERENT TYPES OF WORKPLACE PLANS

Most workplace retirement plans allowing elective deferrals fall into one of these varieties: 401(k) plans for employees of private sector companies. 403(b) plans for employees of tax-exempt employers, public schools and churches. 457(b) plans for employees of state and local governments. Although many of the tax rules governing these types of plans are the same, there are some important differences. (This article doesn’t cover the Thrift Savings Plan, for federal government workers and the military, or 457(b) “top-hat” plans for employees of tax-exempt employers.)

SECURE Act Requires Action if a Trust is Your IRA Beneficiary

Many IRA owners have named trusts as their IRA beneficiaries. You may be one. Trusts offer control from the grave and can be a smart choice, especially to protect beneficiaries who may be minors, have special needs or simply are not good with money. Naming a trust as an IRA beneficiary has always had its problems. The rules are complicated and having a trust drafted and administered can come with a hefty price tag. The ability to stretch RMDs over a trust beneficiary’s lifetime, however, was often enough to outweigh the negatives. The SECURE Act changes this equation. Enter the SECURE Act Under the SECURE Act, most beneficiaries will no longer get the stretch. Instead, most beneficiaries, including trusts, will be subject to a 10-year payout rule. That means all the funds in the inherited IRA must be paid out either to the trust or the trust beneficiaries within 10-years.
 

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