The Slott Report | Ed Slott and Company, LLC

The Slott Report

So You Want to Throw a 401(k) House Party?

When it comes to 401(k) plans, I feel like the Johnny Cash lyric…“I’ve been everywhere, man.” I’ve wholesaled record keeping platforms to financial advisors and sold direct to business owners. I’ve taught novice investors about their mutual fund options and crawled through the weeds of 401(k) plan design with CPAs. I’ve helped enroll participants, assisted advisors with fund selection, worked for a third party administrator (TPA), and participated in 401(k) plans myself. Despite the popularity of retirement plans, understanding how the core pieces fit together remains a mystery to most. In order to explain the moving parts to those looking to implement a new plan, I fashioned an analogy called: “So You Want to Throw a 401(k) House Party.”

Investing IRA Money in Real Estate

So, you want to invest your IRA money in real estate? Every so often we get this question from advisors wondering what they should look out for. Under the tax code, real estate is a permissible investment for IRAs. However, that doesn’t mean it doesn’t carry its own concerns which should cause you to think twice before jumping in. Below are some things you should take into account before using IRA money to purchase real estate. IRA Custodial Document – Even though the investment is perfectly legal, you need to check the custodial document before making the investment. That’s because IRA custodians can prohibit their accounts from holding real estate. In fact, many do because of the concerns mentioned herein. Thus, investing IRA money in real estate will usually call for a self-directed IRA. Even in this case you still must check the custodial agreement. If your IRA document contains this restriction and you ignore it and invest in real property, you can end up with a taxable event and lose your retirement savings.

RMDs & QCDs: Today's Slott Report Mailbag

Question: Client passed in the middle of December 2018, but did not take her RMD. We are setting up beneficiary IRA accounts. We will be moving assets over to the beneficiary IRA accounts and then the beneficiary will take the RMD distribution. Should they take the 2018 distribution that was due and then take an additional distribution during 2019 based on their life expectancy? Should they do anything to explain the 2018 RMD taken in 2019? Thank You Kathy Answer: Kathy, Based on the wording of your question, I am assuming the beneficiaries of the IRA are non-spouse beneficiaries and are younger than the original account owner. If this is the case, then Step One is to take her RMD for 2018. These funds will be payable to the beneficiaries. Since the 2018 RMD was not taken by December 31 of last year, it will be a missed RMD and potentially subject to a 50% penalty. The beneficiary pays the penalty by filing Form 5329 as an attachment to their federal income tax return.

Correcting Excess IRA Contributions Without Penalty

Not all contributions to IRAs belong there. When a contribution is not permitted in an IRA, it is an excess contribution and needs to be fixed. The bad news is that excess contributions happen easily and often. The good news is that if you properly correct the contribution you can avoid the excess contribution penalty. October 15 Deadline When it comes to the timing of an excess contribution correction, the key deadline is October 15 of the year following the year for which the excess contribution is made. The statutory deadline is actually the tax-filing deadline including extensions. However, the IRS has said that the applicable deadline for taxpayers who file a timely return is six months after the due date for filing the tax return, excluding extensions (October 15 of the year following the year for which the contribution was made). Why is this date so important? A 6% penalty applies to excess contributions. This penalty is not a one-and-done thing. It will apply every year that an excess contribution remains in the IRA. The only way to avoid the 6% penalty when an excess contribution occurs is to correct it by the October 15 deadline.

Disability – A High Hurdle

There are a number of ways an individual can avoid the 10% early withdrawal penalty from their IRA or employer work plan. Some exceptions apply specifically to IRAs (i.e. higher education; first-time home buyer, etc.) and others pertain only to company plans (for example, the age-55 exception and qualified domestic relations orders, among others). As long as the account holder meets the definition of the exception and files proper paperwork, the IRS will allow penalty free-withdrawals. While death is the most severe, there is another exception that applies to both IRAs and company plans that seems to loom over all others: Disability. Whether or not someone is disabled is highly subjective. However, when it comes to avoiding the 10% early withdrawal penalty by claiming the disability exception, the definition is strict, and it is clear.

72(t) Payments and Qualified Domestic Relations Orders: Today's Slott Report Mailbag

Question: Hi I have a question about 72t "If" I am 45 years old, and calculate the amount to withdraw from my ira under 72t via the RMD method, I understand that I must continue calculating the withdrawal via the RMD method every year until I am 59 1/2 years old. But Now what??? My question is- once I am 59 1/2, can I stop withdrawing from my ira even though I had started taking RMDs since the age of 45 (under the 72t plan) And then start taking RMDs again at 72 years old? Or if I start taking RMDs at 45, once I start taking RMDs, I can't stop taking yearly RMDs until I am dead? If you could clarify if I have an option at 59 1/2 years old, or not, I would really appreciate it.

So, You Missed a Required Minimum Distribution…

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.

KonMari Your IRA

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.

Inherited IRAs and Traditional IRA Contributions: Today's Slott Report Mailbag

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

Prohibited Transactions

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.)

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