The Slott Report

It’s common for IRA owners to leave their assets to multiple beneficiaries – for example, their children. Before the SECURE Act, it usually made sense to split the IRA into separate accounts either before or after death. That’s because beneficiaries could stretch payment of their shares over their life expectancy. But, if there were multiple beneficiaries and the account was not split, each beneficiary was required to use the life expectancy of the oldest beneficiary – the one with the shortest life expectancy. Splitting accounts allowed each beneficiary to use her own life expectancy. Under the SECURE Act, most non-spouse beneficiaries must use the 10-year payout rule, which requires the entire IRA to be emptied by December 31 of the tenth year following the owner’s death. No annual distributions are required. Life expectancy is no longer used to calculate payouts for beneficiaries subject to the 10-year rule.

Question: A daughter who has been diagnosed with rheumatoid arthritis is listed as the beneficiary on her father’s Roth IRA. Does this disease qualify as a “chronic illness” for purposes of the exception to the 10-year rule? Is there a definition that the IRS uses for chronic illness? If she doesn’t take the inherited IRA after 10 years but withdraws it based on her life expectancy, will the IRS send a letter to her where she has to prove chronic illness? If the IRS doesn’t agree, what will they assess her since the amount is not taxable? Answer: There is no list of illnesses that qualify as “chronically ill.” Instead, to meet the criteria as a chronically ill individual under the SECURE Act, the daughter must be certified (by a licensed health care practitioner) to be unable to perform at least 2 activities of daily living for at least 90 days, or require “substantial supervision” due to a severe “cognitive impairment.”

The coronavirus has been wreaking havoc on markets and millions of retirement account balances have suffered significant losses. This has left many IRA owners looking at lower account balances after several years of gains and wondering what the next step should be. One strategy to consider in a market downturn is a Roth IRA conversion. Why Convert Now? When you convert your traditional IRA to a Roth IRA, your pretax traditional IRA funds will be included in your income in the year of the conversion. This increased income may impact deductions, credits, exemptions, phase-outs, the taxation of your social security benefits and Medicare Part B and Part D premiums; in other words, anything on your tax return impacted by an increase in your income.

When a person takes a distribution from his IRA or workplace plan, he has 60 days from the day of receipt to redeposit (i.e., roll over) those dollars into another qualified account. This assumes no other disqualifying rollovers have been done in the past 12 months and these dollars are otherwise eligible to be rolled over. If he fails to redeposit all or a portion of the withdrawal within the 60-day window, whatever amount remains outside of the IRA or workplace plan will potentially be subject to tax and potential penalties. How common are 60-day-rollover fails? Very. Unfortunately, people take withdrawals from retirement plans all the time, fully intent on rolling the money back. However, the reality is that many miss the deadline. But what if there were extenuating circumstances as to why the dollars were not rolled over within the 60-day period? After all, sometimes life gets in the way of the best intentions.

Hi Ed, First of all, I'm a big fan. Now here's my question: If I do a backdoor Roth conversion with exclusively nondeductible IRA contributions, is there a 5-year clock on withdrawing the converted dollars without penalty? In this case there are no other outstanding IRA dollars. I know there’s a 5-year clock on conversions of deductible contributions. I wouldn’t think there would be a 5-year clock on withdrawing converted nondeductible IRA contributions, but I couldn’t find anything definitive saying that it was okay. What say you? Thanks! Chris Answer: Hi Chris, Thanks for the nice compliment! The 10% early distribution penalty typically applies to distributions of converted amounts if you’re under age 59 ½ and the conversion was less than five years ago.

The amount of annual elective deferrals you can make to a 401(k) or 403(b) plan is limited by the tax code. If you discover that you’ve over-contributed in 2019, time is of the essence to correct the error. If you don’t act quickly, the tax consequences are serious. What is the limit? For 2019, you were limited to $19,000 in elective deferrals (plus an additional $6,000 if you were at least age 50 at the end of the year). It’s important to remember your deferrals to each company savings plan are normally aggregated for purposes of this limit. (There is an exception if you participate in both a 457(b) plan and a 403(b) plan.) How do you know whether you’ve exceeded the limit? Most plans have mechanisms in place to prevent you from exceeding the deferral limit in that plan.

The SECURE Act eliminated the age restriction on contributions to traditional IRAs. The rule outlawing contributions for those 70 ½ or older is no more. This is good news for older IRA owners who are still working or have a spouse who is. Now, traditional IRAs have joined Roth IRAs as available options for eligible savers of all ages. This new rule may seem straightforward, but we have been getting some questions about who is eligible and when it is effective. Making Contributions and Taking RMDs One area of confusion for some IRA owners is how the new rule eliminating the age limit for traditional IRA contributions works with another new rule in the SECURE Act, the rule raising the RMD age to 72. IRA owners who reached age 70 ½ in 2019 cannot take advantage of the new ruling delaying RMDs until age 72.

Question: My dad was 86 when he died and I inherited half of his IRA, which I elected to stretch. Am I correct in thinking that since I am not yet 70 ½, I am not allowed to direct qualified charitable distributions (QCDs) from this IRA? Please advise. Thanks, Ron. Answer: Hi Ron, You are correct. Beneficiaries can do QCDs, but to be eligible the beneficiary must be age 70 ½. If you have not yet reached that age, you may not do a QCD.

True or False? “It is mathematically impossible for an IRA account owner to have his first required minimum distribution (RMD) be due for the year 2020.” Here’s why this statement is true. First, we are not talking about inherited IRAs. If the account owner died in 2019, then the first RMD for the beneficiary needs to be taken by December 31, 2020. Inherited IRAs do not fit this statement. Next, we are not talking about workplace retirement plans – like a 401(k). The reason this statement does not apply to a 401(k) is because of the pesky “still-working” exception. If a plan has the still-working exception feature and an older employee separates from service in calendar year 2020, then the first RMD will also be due for 2020.

Who can offer them? Most company retirement savings plans, such as 401(k), 403(b) and 457(b) plans, are allowed to (but not required to) offer plan loans. Loans are not allowed from IRAs or SEP and SIMPLE-IRA plans. What is the maximum amount I can borrow? Plan loans are generally limited to the lesser of 50% of your vested account balance, or $50,000. Your employer can allow an exception to this rule: If 50% of your vested account balance is less than $10,000, you can still borrow up to $10,000. Example 1: Justin participates in a 401(k) plan that allows plan loans. Justin’s vested account balance is $16,000. If his plan doesn’t allow the exception, the most Justin can borrow is $8,000. If the plan allows the exception, he can borrow up to $10,000.