The Slott Report

Are you acting in your clients’ best interest when it comes to rollovers? On June 30, the new SEC Regulation Best Interest (Reg BI) becomes effective. Reg BI establishes a “best interest” standard of conduct for broker-dealers when they make recommendations to clients of any securities transaction or investment strategy involving securities. Reg BI specifically covers proposals for rolling over funds from a workplace retirement plan account to an IRA. Under the new standard, brokers must “exercise reasonable diligence, care and skill when making a recommendation to the client.” This requires the financial professional to understand the risks and rewards of the recommendation, as well as its costs, for each client.

On June 19, the IRS released additional guidance on coronavirus-related distributions (CRDs) from retirement accounts. The new guidance will make many more individuals eligible for these tax-advantaged distributions allowed under the CARES Act. What Is a CRD? If you qualify as an “affected individual”, you can take up to $100,000 of distributions from your IRAs and employer plans in 2020. There is no 10% early distribution penalty if you are under age 59 ½, and you have an option to spread the federal tax on CRDs evenly over a three-year period beginning with the year 2020. You also have a three-year period to repay CRDs to an IRA or employer plan. Taxes can be refunded on the amounts repaid. Repayment does not have to be made to the same IRA or company plan from which the CRD was originally paid.

Question: Thank you for all the great resources you provide. I have been looking for an answer to my specific situation and have not been able to find a clear answer to what I think is a pretty straight forward situation/fact pattern. I take my RMDs spread over a monthly basis on the 6th of each month. (I have taken four in 2020 - Jan, Feb, Mar, Apr). Under the new legislation that extends the "60-day rollover window" for distributions taken on or after February 1, 2020 to July 15, 2020, am I able to roll back all three distributions (Feb, Mar and Apr) in one contribution (rollover) into my IRA, or am I limited to only being able to roll back one month's worth of distributions? Thanks for your help and all you do. Dale

FIX: Rolling Over the Tax Withheld on a Distribution. Was the mandatory tax of 20% withheld on your work plan withdrawal even though you intended to roll over the entire account? Did you change your mind on an IRA withdrawal and now want to roll it back, but you elected to have taxes withheld on the initial distribution? If money was withheld for taxes on a distribution from a work plan or an IRA and you want to roll over the distribution plus taxes withheld, you can make up the difference “out-of-pocket.” The money withheld and sent to the IRS is gone, but you can replace that withholding with other dollars, roll over the full amount, and have a credit waiting for you for the amount withheld when you do your taxes next year.

In the wake of the coronavirus pandemic, the IRS has temporarily relaxed the rule that spousal consent to certain retirement plan distributions and loans must be witnessed personally by a notary public or a plan representative. In Notice 2020-42, issued June 3, 2020, the IRS says that remote witnessing can be used for 2020 spousal waivers. This issue arises most frequently when a married participant in a private-sector defined benefit plan or money purchase pension plan elects a lump sum distribution (including a coronavirus-related distribution under the CARES Act) or a plan loan. The plan is not allowed to pay the lump sum or make the loan unless the participant’s spouse gives written consent. [This spousal consent rule does not apply to most 401(k) or 403(b) plans or any governmental or church-sponsored plans.] IRS rules require that spousal consent must be witnessed in the physical presence of a notary public or a plan representative.

Question: Under the SECURE Act, if we can assume a Special Needs Trust can qualify for the stretch via the disabled beneficiary, what happens when the special needs trust beneficiary passes? The next named beneficiary (remainder) is a brother and/or nephew under this trust. Yet it's already an inherited IRA. Would that formula continue to the next remainder beneficiary in line, i.e., would the stretch continue? Answer: The SECURE Act left many questions unanswered, especially when it comes to trust beneficiaries, but your situation may have an answer. You are correct that, under the new law, there are special rules for a trust for disabled or chronically ill beneficiaries that allow RMDs to be paid from the IRA to the trust using the beneficiary’s life expectancy.

By now, most IRA owners have heard the bad news. The SECURE Act eliminates the stretch IRA for the majority of beneficiaries who inherit in 2020 or later. Instead, for most, a 10-year payout rule will apply. Here is how this new rule works and how, for some beneficiaries, there may be new planning opportunities available. How It Works This new 10-year rule works like the old 5-year rule worked. There are no annual RMDs. Instead, the entire account must be emptied by the 10th year after the year of death. In the 10th year following the year of death, any funds remaining in the inherited IRA would then become the required minimum distribution (RMD).

The King of the Land wanted to send 100,000 of his greatest warriors off to battle. However, he was told that 20,000 of the warriors needed to remain behind to protect the castle. The King of the Land did not like this news. He wanted a full complement of soldiers in the fight. So, the King of the Land decided to send all 100,000 warriors off to battle, and he used an additional 20,000 warriors from another army to protect the castle. The investor wanted to convert $200,000 of his traditional IRA to a Roth IRA. However, it was recommended that he withhold 24% for taxes. The investor did not want to send only $152,000 to his Roth.

Question: I understand that I don’t have to take any RMDs during 2020. However, is the CARES Act rule that it is an-all-or-nothing for RMDs or can I take a portion of my RMD for 2020 but not all John Answer: Hi John, Since RMDs are waived this year, you have complete flexibility. In 2020 you can take none of what would have been your RMD, some of it, all of it, or even an amount greater than what would have been your RMD amount.

As a result of the current economic downturn, we can expect more and more companies to offer lump sum buyouts to employees with defined benefit (DB) plan benefits. A lump sum buyout is a limited opportunity for DB plan participants to elect one lump sum distribution in exchange for giving up future periodic payments. The decision of whether to accept a lump sum buyout is a difficult and important one. Because the stakes are so high, it is crucial that you consult with a financial advisor before making a final decision. Here are several factors that you and your advisor should consider: