The Slott Report

Mistakes happen, and when dealing with complicated rules like the U.S. tax code, they aren’t exactly uncommon. Thankfully, the IRS has numerous ways various mistakes can be corrected, and one of the most lenient processes is for missed required minimum distributions (“RMDs”). To say that the missed RMD penalty is stiff (i.e., 50% of the missed amount) is a gross understatement. If you don’t ask for relief in the right manner, the IRS can impose the penalty and interest on the missed amount. Therefore, knowing how to ask for relief for this type of mistake is more important than ever. Missed RMDs can happen under a variety of circumstances, but the most common are misinformed non-spouse beneficiaries and IRA owners who simply misunderstand the rules and are poorly advised. Most non-spouse beneficiaries are unaware that the first RMD must be issued by December 31st of the year after the IRA owner dies. And sadly, while some are told this shortly after the IRA owner’s death, few custodians will follow-up to make sure the distribution was in fact made.

Marie Kondo is a decluttering and tidying expert from Japan. She has a new show on Netflix, Tidying Up with Marie Kondo, that is a huge hit. Thrift shops around the country are reporting a large influx of donations as Americans reevaluate their homes and tidy up using the “KonMari” method. While your retirement accounts may be a little different than your home, we can take some inspiration from Marie Kondo. Here are 4 steps you can take to tidy up your IRA and other retirement accounts 1. Consolidate: Things have changed. The era of working at one job for fifty years and getting a pension from that job upon retirement is long gone. Workers change jobs frequently. The result can be multiple retirement accounts. You may have several 401(k) plans still with old employers. Maybe you have multiple IRAs. While having multiple retirement accounts can sometimes serve a purpose, like diversification of investments, in many cases it simply can happen by accident. The result is more accounts to keep track of and more paperwork.

Question: I am in the process of setting up a QTIP because my current wife (age 64) is not the mother of my 2 children (ages 41 and 38). If I pre-decease, the IRA will go to my wife within the trust. When she passes and the IRA is inherited by my children, will the RMDs be based on my wife's age when she passed or will they be based on the ages of my children? Thanks Mike

If I decide to climb on the roof of my house and try to ride a unicycle while blindfolded, it is not illegal. Dangerous, yes, but not in violation of any laws. If I elect to randomly jump off a bridge under the guidance of the Usually Successful Bungee Jump Company, it is my prerogative. Again, not against the law, but potentially destructive. And if I choose to empty my IRA account and bet it all on the Superbowl in Las Vegas, hoping to win big, pocket the winnings, and roll the withdrawn dollars back into my account before the 60-day rollover window closes, I can do that, too. Treacherous, risky and dumb, but not a prohibited IRA transaction. So, what constitutes a “prohibited transaction” within an IRA? Prohibited transaction rules are in place to discourage account owners from acting in a self-serving or “self-dealing” manner. IRA assets are to be invested in a way that benefit the account itself as opposed to the account owner personally or other “disqualified persons.” (Essentially, “disqualified persons” include the IRA account owner, the owner’s spouse, ancestors and lineal descendants, investment managers and advisors, those providing services to the IRA, and entities in which the IRA holder owns a controlling equity or management interest.)

In my last installment, I talked about one of my two favorite beginning of the year topics when it comes to retirement planning: New Year’s Resolutions (https://www.irahelp.com/slottreport/easy-new-year’s-resolutions-your-retirement). Here, I want to talk about the second topic, the most important laws, regulations, rulings, and decisions from 2018 that affect IRAs going forward. We’ve seen plenty of activity over the past year, on all fronts, so I boiled the discussion down to a top 5 (with an “and-1” tacked onto the end). Recharacterization of Conversions Eliminated – Technically, this law was passed in 2017, but no list would be complete without it. Under the Tax Cuts and Jobs Act (“TCJA”), the ability to recharacterize conversions was eliminated for any conversion completed on or after January 1, 2018. This change is a big deal. That means there are no do-overs when it comes to conversion, which in turn, also means that if you are doing a conversion, you need to be absolutely certain of two things: (1) That you accurately account for the income tax effect; and (2) that have the money (in non-tax deferred accounts) to pay the extra taxes. As a result, it’s safest to execute a conversion closer to the end of the year.

Question: Dear Ed, Thanks for all your work on the retirement frontier. I have a question…we have married clients who are age 70 (he) and 62 (she). Both clients have IRAs. The 62-year-old client just passed away. I know that the surviving spouse can rollover the decedent’s IRA into his IRA and the RMDs will begin (on the combined funds’ value) once he reaches 70.5. I also know that he can create an inherited IRA for the decedent’s IRA funds and does not have to begin taking RMDs until she would have been 70.5, but then has to take them according to the Single Life table if left in the Inherited IRA account. Is it possible for him to create an inherited IRA, receive his wife’s funds, allow them to grow for 8.5 years until she would have been 70.5, then roll them into his IRA account and use the Uniform Life table factor for future RMDs with the combined funds? It seems if this is possible, this would be the best strategy. Thanks for your help clarifying this issue. Best regards, Andy

A word we don’t see much in daily conversation is “deem.” I imagine a sweeping proclamation made by an authority figure from an ivory tower: “It is deemed that the third day of the standard workweek shall henceforth be called ‘Wacky Wednesday.’” While working “deem” into a sentence among friends can be tough, and you might get some sideways looks, the IRS has no such difficulties. “Deemed distributions” come to mind. When a retirement plan loan goes bad, a deemed distribution can rear its ugly head. A participant in a workplace retirement plan cannot take money from the plan willy-nilly. There are rules in place and consequences should one go astray. For example, participants may receive a nontaxable loan of up to 50% of their vested account balance, with a maximum loan amount being the lesser of 50% of the vested account or $50,000. That means if someone has a vested account balance of $120,000, the maximum loan amount is $50,000. On the other hand, if the vested account is only $80,000, the maximum loan limit is $40,000.

Roth IRAs offer a trade-off. You decide to pay taxes now on your contribution (or conversion) in exchange for tax-free earnings down the road. Don’t miss out on Roth IRA benefits by making mistakes when you take a distribution. Here are six rules you need to know to make sure money comes out of your Roth IRA tax-free. 1. Aggregate your Roth IRAs. For tax purposes, all of your Roth IRAs are considered one Roth account. There is no tax benefit gained by keeping conversions in a separate Roth IRA from your contributions. This is sometimes called the aggregation rule. 2. Follow the ordering rules. Funds leave your Roth IRAs in a certain order. Contributed amounts are distributed first. Converted amounts are distributed next, first in, first out. Last out would be earnings.

Question: Hi Mr. Slott: I turn 70 ½ years old this year (D.O.B. 5-28-49) and must commence RMDs for an IRA total asset value as of 12/31/2018. When do I have to report this RMD on my tax return - before or no later than 4/15/2019? I have all my IRA funds with one custodian. Do they calculate the RMD or do I have to calculate? Also, my spouse has an employer 401a - can she aggregate the employer plan with all her other IRA funds for the RMD and withdraw from one of the IRA accounts, or does she need to segregate these two retirement classes (IRA vs 401a) and withdraw the RMD from each? Thanks for your help and looking forward hearing from you soon. Your Friend, Bob

When it comes to tax law and retirement planning, there are two things I like to talk about at the beginning of a new year: (1) some of most important rulings issued and laws passed in the prior year; and (2) the steps you can take today to improve your savings for retirement in the future. Since the topic du jour has been New Year’s resolutions, I want to tackle the second topic in this installment.