The Slott Report | Ed Slott and Company, LLC

The Slott Report

Roth or Traditional IRAs and Trust Beneficiaries: Today's Slott Report Mailbag

Question: My Daughter is a 30-year old RN and I want to help her contribute to an IRA. She has a 401K at the hospital where she works, but she only contributes to maximize their 4% matching. It is my understanding she can still contribute (up until April 15th, 2019) $5,500 to either a 2018 ROTH or a 2018 traditional IRA. At her age, the growth on an IRA over time should be huge. Would a ROTH always be a better IRA to put her $5,500 and forgo the reduction on her taxable income from the traditional IRA? Thanks! Ted Answer: Ted, I completely agree with everything you’ve said. Your daughter should continue to contribute to her employer at least up to the amount necessary to get the maximum matching contribution.

The Lunar Landscape of Bankruptcy Protection for Inherited IRAs

When a legal question is clear, I like to imagine the landscape like the great plains of the midwestern United States. The land is flat and lush, meaning problems are easily identified and the area can be easily traversed. On the other hand, when the question isn’t so clear, the terrain reminds me of the moon; rocky, dark, desolate, and full of potholes and craters. Naturally, we hope that every legal issue we encounter is like the rolling plains of the breadbasket of America. Unfortunately, that is not always the case. And such is the situation when it comes to the protection of inherited IRAs in bankruptcy court.

Options and Pitfalls for Non-spouse Beneficiaries

Much attention is paid to the favorable options available when spouses are named as IRA beneficiaries. However, a significant portion of IRA assets will end up being inherited by individuals who are not a spouse of the decedent. Many people name siblings, friends, children or others as their IRA beneficiaries. Also, IRA assets that start off with spouse beneficiaries often end up in the hands of non-spouse beneficiaries. How so? A typical scenario is for spouses to name each other as IRA beneficiaries. After the death of first spouse, the surviving spouse will often transfer the inherited IRA assets to an IRA in their own name. At that point they are likely to name a non-spouse beneficiary if they do not remarry. Because IRA assets frequently wind up being inherited by someone other than a spouse, it is critical to understand both the possibilities and pitfalls for these non-spouse beneficiaries. When an IRA owner dies, there is no probate or other process necessary to transfer the IRA funds to the beneficiary named on the beneficiary designation form. Instead, the IRA becomes the beneficiary’s property by the fact of the IRA owner’s death. Generally, the beneficiary will provide a death certificate to the IRA custodian. The account will then be retitled as a

Roth Contributions and The Value of Your IRA: Today's Slott Report Mailbag

Question: Hello, I am a CPA and was not sure if in 2019 alimony was considered earned income for making a Roth IRA contribution. Would appreciate any clarification you can provide. Thank you very much. Have a great day! Dale Answer: Dale, This issue was one of the changes enacted under the Tax Cuts and Jobs Act. Under the old law, alimony was taxable to the recipient. That means it would be considered earned income and therefore able to be used in making a Roth IRA contribution.

Ivan Seeks Advice

Ivan is an inventor at heart, but he is stuck in an office at a job he does not particularly care for. Ivan constantly daydreams about starting his own company and improving everyday life with his inventions. For 20 years Ivan funds his 401(k) and tinkers with his creations when he gets home from work. With a burst of inspiration, Ivan invents the widget. He thinks the widget will transform the world. At age 50, Ivan strongly considers quitting his job and starting his own business. However, he needs capital to market and mass-produce the widget. Ivan’s only savings is his 401(k) at the job he doesn’t enjoy. Ivan could roll the 401(k) into an IRA and take a withdrawal, but this would result in taxes and a 10% penalty because Ivan is under 59 ½.

Roth Contributions and Conversions: Today's Slott Report Mailbag

Question: In 2017, I opened a Roth IRA through my company. Being over 65, I mistakenly thought I could convert Traditional IRA funds to the Roth if I paid tax on the rollover amount. In August 2018, I had Schwab roll $50,000 into my Roth from my traditional IRA. This month (February 2019) when doing my 2018 taxes, I realized that conversions are not allowed in 2018, and withdrawals are not allowed from a Roth younger than 5 years old. What are my options for undoing this situation without paying a 6% yearly penalty? I am prepared to pay income tax on the amount. Thank You Chris Answer: Chris, Assuming I understand your terminology, I think I have some good news for you! First, you did NOT make a mistake. Converting Traditional IRA funds to a Roth IRA is certainly still allowed and is a great estate planning tool for the right people.

“Gap Analysis”

There are many gaps. Generation gap, stop-gap, The Gap Band. In baseball you can hit into the gap. Football linemen have an A-gap, B-gap and C-gap to concern themselves with. Of course, there is the Cumberland Gap. And there is a very important gap to consider when dealing with IRAs – the “Gap Period.” The gap period begins on the date of death of an IRA owner and ends on September 30 of the following year. A significant amount of planning activity can, and should, take place within this window, including: Post-Death Distributions (i.e. “Cash-outs”): If a charity is named as an IRA beneficiary, there is a good chance they will want the money as soon as possible. The same can be said for an individual who does not care to stretch the IRA and would prefer a lump sum payout. These cash-outs should be completed during the gap period.

NUA and Employer 401(k) Plans: Today's Slott Report Mailbag

Question: If I convert Trad IRA funds to a Roth IRA, does the ratio of After-Tax Contribution to Total IRA holdings include 401k holdings or only IRA holdings.

10 Things to Know about the Required Beginning Date for IRAs

If you have an IRA, you may have heard the term “required beginning date” or “RBD.” This is an important date that every IRA owner should understand. The significance of the RBD is not limited to IRA owners. It is a critical date for IRA beneficiaries as well. Here are 10 things you need know about the RBD: 1. The RBD for an IRA owner is the date by which the first required minimum distribution (RMD) must be taken. 2. For IRA owners, the RBD is always April 1 of the year following the year they reach age 70 1/2. There is no exception to this rule for IRAs. 3. There are a few exceptions to the April 1 RBD for plan participants. These include the “still working” exception for employer plans and the “old money” exception for 403(b)s. These exceptions do not apply to IRAs.

RMDs and Spousal Beneficiaries: Today's Slott Report Mailbag

Question: Hello Ed, I have an elderly client in his 80’s, not in the best of health. He has named his spouse (also in her 80’s) along with his 4 children as primary beneficiaries of his IRA. That said, I know the 4 children will have to establish inherited IRA’s – and keep them in such an account forever, receiving RMD’s at the single life table rate. However, is there some special handling that needs to be done by his spouse (who also has her own IRA and of course is receiving her own RMD’s) – since she is not the sole primary beneficiary listed – or should it just be a straight forward spousal rollover of her portion into her own IRA??? Thank you! Mike Answer: Mike: You have a good understanding of the rules and issues. The key to taking advantage of all the rules is to split the account. Technically, it doesn’t have to be done until December 31st of the year following death, but you could have the client do so now. By splitting the account now, we avoid the post-death deadline, each beneficiary gets to use their own life expectancy for post-death RMDs, and the spouse can execute the spousal rollover (if advisable).

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