The Slott Report

IRAs have now been around for decades. This means these accounts are now being inherited by beneficiaries and even, increasingly, by successor beneficiaries. Here are 3 things you must know if you are a successor beneficiary who inherits an inherited IRA: You can continue the stretch. One of the first questions you may have when you inherit an inherited IRA may be about when distributions are required. You may wonder if you can continue the stretch or maybe even extend the stretch over your own life expectancy. The bad news is that as a successor beneficiary you cannot use your own life expectancy to calculate required minimum distributions (RMDs).

You may know that you participate in a DC retirement plan. But what exactly does that mean? (Hint: It doesn’t mean that your plan is sponsored by the District of Columbia.) “DC” actually stands for “defined contribution” plan. Defined contribution plans are a type of company retirement plan and are distinguished from DB (“defined benefit”) plans/ Types of DC plans. The most popular types of DC plans are 401(k) plans, 403(b) plans and 457(b) plans. Each of these types allows employees to make salary deferrals and may also allow employer contributions. 401(k) plans are for employees of private sector companies. Thrift savings plans (TSPs) are similar to 401(k) plans and are for employees of the federal government and for the military. 403(b) plans (also known as tax-sheltered annuity or TSA plans) are for employees of public schools,

Question: Hello, I have heard Ed speak at several different Wells Fargo events and he spoke one time about clients who over contribute to their 401(k). I believe there was a strategy where they can move the excess to an IRA. Can you tell me where to find more info on this strategy? Answer: There is no strategy to move an excess 401(k) contribution to an IRA. To avoid being taxed twice, excess plus earnings attributable must be removed by April 15th of the year after the year the excess was contributed. There is no way to “fix” it with a rollover or some other transfer as the excess is ineligible to be rolled over. The combined allowable amount contributed to a 401(k) by employer and employee is $56,000 in 2019 ($62,000 over age 50), and that cap cannot be breached.

Just as IRA and 401(k) plans have different levels of bankruptcy protection, so too do other possessions. Whether these assets are qualified or not, there are ways to shield oneself from creditors. Case in point - in order to shelter certain monies, a couple in Wisconsin sold their 1974 Plymouth and some real estate. They subsequently purchased a non-qualified annuity with the proceeds. Their creditors did everything in their power to disqualify the annuity to gain access to the funds, but were unsuccessful. The Court ruled that the couple had successfully used “exemption planning” to remove the assets from their bankruptcy estate.

The Setting Every Community Up For Retirement Enhancement (SECURE) Act recently passed the House of Representatives by a large margin. It is currently stalled in the Senate. This bill includes a multitude of provisions that would reshape retirement savings if passed. Buried deep within the proposed legislation is a provision that would do away with the stretch IRA for most beneficiaries. We have received many questions on this provision. Here are a few of the most common:

Question: As I understand it, a contribution would be income tax free when sent directly from an IRA to a 501(c)(3) organization. It is not clear to me if the distributions still will affect my MAGI that in turn will affect Medicare Part B IRMAA premiums. Jennifer Answer: Hi Jennifer, If your IRA distribution satisfies the conditions for a qualified charitable distribution (“QCD”), the distribution will not be taxable to you. That, by itself, won’t lower your modified adjusted gross income (“MAGI”). However, if the QCD is used to satisfy the required minimum distribution (“RMD”) from your IRA, that will reduce your MAGI.

Participating in a company plan, like a 401(k) or 403(b) plan, is a great way to save for retirement. But to make sure that employees don’t use those plans as checking accounts, Congress has imposed limits on when you can withdraw your funds. Generally, you can’t receive a distribution until severance from employment, disability or death. Most plans also allow payouts after age 59 ½ - even if you’re still working – and allow you to borrow against part of your account while still employed. Beyond that, your plan may (but isn’t required to) let you pull out your funds to take care of a financial hardship. Here’s a quick summary of how hardship withdrawals work:

Many company retirement plans – like a 401(k) – offer company stock as an investment option. Under special tax rules, a plan participant can withdraw the stock and pay regular (ordinary) income tax on it, but only on the original cost and not on the market value, i.e., what the shares are worth on the date of the distribution. The difference (the appreciation) is called the net unrealized appreciation (NUA). NUA is the increase in the value of the employer stock from the time it was acquired to the date of the distribution to the plan participant. The plan participant can elect to defer the tax on the NUA until he sells the stock. When he does sell, he will only pay tax at his current long-term capital gains rate – even if the stock is held for less than one year. To qualify for the tax deferral on NUA, the distribution must be a lump-sum distribution. This means the entire plan must be emptied in one calendar year, including all non-company stock within the plan.

Question: Hi Ed, I have heard conflicting reports. Would the proposed SECURE Act affect Roth IRAs? Or, is the elimination of the stretch on for Traditional IRAs? Many thanks! Chad Answer: Hi Chad, There does seem to be a lot of confusion out there on this issue. Yes, the SECURE Act, if passed, would affect inherited Roth IRAs as well as inherited Traditional IRAs. The stretch would be eliminated for most beneficiaries and replaced with a 10 year rule. Remember, this is only proposed and still has yet to be passed into law.

You may wonder about naming your trust as your IRA beneficiary. For some that may be the way to go, but you should be careful. Trusts are not for everyone. There are trade-offs and consequences. Trusts as IRA beneficiaries create unique problems and tax complications. Naming a Trust Many IRA owners will name a living person as beneficiary of their IRA. Often that person is a spouse or child. You could simply name that person on the IRA beneficiary designation form. If you want to name your trust instead of naming a person as a beneficiary on your IRA, you would name your trust on the beneficiary designation form.