The Slott Report

Question: Greetings, There seems to be a lot of conflicting information on Inherited Roth IRAs, for which I was hoping to get a definitive answer from the experts. My understanding was that a non-spouse beneficiary (who is not an eligible designated beneficiary), who inherits a Roth IRA wouldn’t be subject to annual RMDs but would be subject to emptying the account within 10 years of the original account owner’s death (for account owners who died after 2019, that is). I thought this exception was predicated on the original account owner of a Roth IRA not being subject to a required beginning date (RBD).

If you recently converted your traditional IRA to a Roth IRA and you under 59 ½, you will want to know about the five-year rule for penalty-free distributions of converted funds from your Roth IRA. Many people are not aware of it. Not understanding how the rule works can result in heavy penalties when you withdraw your Roth IRA funds.

In my April 12 Slott Report entry (“5 Reasons to Open a Roth IRA Immediately!”), I included a handful of points as to why it was imperative to open a Roth IRA, especially before the tax filing deadline. But a coin has two sides. Here are 5 reasons why you should NOT open a Roth IRA:

Question: Can I make a qualified charitable distribution (QCD) from my IRA to pay for my grandson’s summer church camp? Susan

One important way that IRAs differ from company retirement plans is with respect to spousal financial rights. Most married IRA owners do not need spousal consent before designating a beneficiary other than the spouse. By contrast, most married plan participants do need to get their spouse to agree to a non-spouse beneficiary. And married participants in some types of plans also need spousal consent before taking a lump sum distribution from the plan.

More 401(k) plans are starting to offer Roth options. If you now have this option, you may be wondering what the difference is between a Roth IRA and a Roth 401(k). Which account is right for you? These accounts have a lot in common. Both offer the ability to make after-tax contributions now in exchange for tax-free earnings down the road if the rules are followed. However, there are some important differences between the two plans that you will want to understand.

Question: Both of my parents passed away last year. My mother passed earlier in 2022 and I was able to take her year-of-death RMD out of the inherited IRA before the end of the year. My dad passed in October and once I got the inherited IRA transferred over in December, I forgot to take his year-of-death RMD until January of 2023. What forms will I need to complete to request a waiver, and would this be a good cause for a waiver?

Time is running out! The tax filing deadline is Tuesday, April 18. Why is this important? Because that is the last day an IRA can be opened and/or funded for the previous year. Even if a taxpayer files for an extension, that does NOT extend the prior-year IRA contribution deadline.

Despite the reduction in the penalty for missing required minimum distributions (RMDs) in the new SECURE 2.0 law, it looks like you will still be able to get the IRS to waive the penalty altogether. Before 2023, if you missed an RMD the IRS could impose a penalty equal to 50% of the missed amount. However, the IRS almost always waived the penalty if you took the RMD and filed Form 5329 (with a reasonable cause explanation) with the IRS.

Question: I have been told that QCDs are not allowed from local and state government 457(b) plans. I have looked at the accountant’s IRS manual, websites etc. and I can’t find any information that prohibits QCDs from this type of plan. Can you shed some light on this?