The Slott Report

SIMPLE IRAs are not so simple. One factor that makes SIMPLE IRAs tricky is that they are subject to unique rules, found nowhere else in the tax code, such as the two-year holding period. Two-Year Holding Period When does the two-year holding period begin? This is a question that often creates confusion. The two-year holding period begins with the date the employee’s first contribution is deposited to the SIMPLE IRA. It is not the date employment begins or even the date you become eligible to participate in the SIMPLE IRA plan. 25% Early Distribution Penalty Distributions taken from a SIMPLE IRA before age 59 ½ are subject to an early withdrawal penalty of 25% when withdrawn during the two-year holding period.

Question: IRA HELP, I’ve got a client who is retiring early. He has roughly $1,000,000 in an IRA now which he could initiate a 72(t) with. That will not generate enough cash flow to support their needs. He also has an additional $3 million in his employer’s ESOP which, under the terms of the ESOP, will not be available for an IRA rollover until August of the year after he retires. Can he do a 72(t) with his current IRA and then when he rolls out the funds from the ESOP can he do a 2nd 72(t) with that? In other words, can you have two IRA’s both with 72(t)s at the same time? Jason Answer: Jason, Yes, a person can have two different 72(t) payment schedules from two different IRAs, but tread lightly. You did not mention your client’s age in your email, which has a significant impact on 72(t) distributions. For the uninitiated, a 72(t) payment schedule allows a person under age 59 ½ to tap their IRA accounts penalty free. However, the payments must continue for the LONGER of five years or until you reach age 59½. If your client is only 45, he is looking at a minimum 15 years’ worth of payments. A lot can happen in that time period, and 72(t) schedules cannot be changed. The payments are ineligible to be rolled over, and any missteps along the way could wreck the entire 72(t) schedule, potentially resulting in a 10% early distribution penalty on all previous distributions. Question: Dear Mr. Slott and team: I hope you can help me. Despite reading much of the IRS web information, and many other websites on RMDs from IRAs, I have some remaining confusion on taking my first RMD. Here's the situation I have questions about:

The IRS has announced the 2020 inflation-adjusted limits for Health Savings Accounts (HSAs). How an HSA Works An HSA is a tax-free account that is used to pay for qualified medical expenses that aren’t covered by insurance. It is similar to an IRA in that it’s a custodial or trust account set up with a financial institution owned and controlled by the individual, not the employer. An HSA is designed to be used in conjunction with a high deductible health plan (HDHP). The HSA can be used to pay for health expenses until the plan deductible is met. The HDHP would then cover the high-cost medical expenses.

Employer-sponsored retirement plans, like 401(k) and 403(b) plans, have some definitive benefits vs. IRA accounts. For example, company plans provide an unlimited amount of protection from bankruptcy, while IRA contributions and earnings maintain a current bankruptcy protection cap of $1,362,800. In addition, employer-sponsor plans can allow loans – IRAs cannot - and retirees of certain plans (state and local public safety employees) can gain penalty-free access to plan dollars as early as age 50. Barring an exception, IRA owners must wait until age 59 ½ before they can access their funds penalty free. Another feature that employer-sponsored retirement plans offer that IRAs do not is the ability to delay required minimum distributions (RMDs).

Question: I have a question about avoiding RMDs for a still-working 73 year-old in a 401k plan. I realize most people my age are looking forward to retirement, but I love what I do and am delighted to continue to be able to work. I am about to change employers and would like to request a “direct rollover” from my old employer (who I still work for as of this writing) to my new employer (once all of the i’s are dotted and the t’s are crossed). There will be/should be no gap in employment once all of the employment paperwork is complete and I turn in my official notice. (Not sure if that fact makes a difference). Is there a requirement that I take an RMD in the year I change employers in conjunction with the change? I do not know if my “old” (existing) employer will do a “direct rollover” to the new employer, or for that matter, if the new employer will accept a “direct rollover,” but I would much rather delay RMD’s against this account as long as possible. Forewarned is forearmed and I would appreciate your take on this.

After a recent Ed Slott conference in Dallas, Texas, I found myself sitting in a hotel café, surrounded by travel bags, having pizza with a few meeting attendees with later flights. “Anyone want to share an Uber to the airport?” asked a lunch guest. “Sure,” I said. “I’ll join you.” After all, the Uber was already ordered, and I am always more comfortable at my gate. Never know how long it will take to get through security. The ride to the airport was pleasant, and the conversation enjoyable. I was headed to the East Coast, and she was headed west. Upon arrival, she jumped out at the Southwest terminal, and I told the Uber driver, “I am American Airlines.”

If you are planning on doing a 60-day rollover with your IRA funds, be sure you understand same-property rule. This is one of the lesser known rules that apply to rollovers and is one many taxpayers find confusing. For IRA-to-IRA or Roth-to-Roth 60-day rollovers, the same property received is the property that must be rolled over. These rules also apply to SIMPLE and SEP IRAs. An individual cannot receive a distribution of cash and then roll over shares of stock that he purchases with the cash or that he currently owns. If cash is distributed from an IRA, then cash must be rolled over within 60 days.

Question: I recently inherited a traditional IRA from my mother. I mistakenly asked for a lump sum to be paid to me by the custodian. I realized after the fact that I wanted to set up a stretch IRA. I haven’t cashed the check yet. Can I just return it or have them stop payment on the check and change my option to an inherited beneficiary IRA? Thank You, Paul Answer: Paul, Once the distribution is paid to you, you cannot roll it over to an inherited IRA. Since the custodian properly followed your original instructions for a lump-sum payout and the check was already issued, you will probably be locked into the result.

With college costs almost certain to keep increasing each year, parents need to explore every possible tool available to meet the challenge of paying for higher education. Roth IRAs are not just for retirement savings. They can play a vital role in education savings. However, the rules can be tricky. Before you take a distribution from your Roth IRA to pay that tuition bill, be sure you understand the tax consequences. Contributions and Conversions If you are thinking of tapping your Roth IRA to pay for college, there is good news if you just withdraw contributions or converted funds. A Roth IRA distribution of tax-year contributions will be tax and penalty-free if used for higher education.

Roth IRAs are extremely popular, and why wouldn’t they be? Tax-free earnings over a lifetime can add up to a serious chunk of change. However, in order to receive those tax-free earnings, rules must be followed and timeframes must be met. Despite the ubiquity of Roth IRAs, there is confusion around what those rules and timeframes are. In order to maximize Roth benefits, it is imperative to understand the central guidelines around the ever-present 5-year windows. In fact, there are two primary Roth IRA clocks to consider.