The Slott Report

In mid-November 2018, the IRS issued proposed regulations altering some of the rules governing hardship distributions from 401(k) and 403(b) plans. Most of the rules weren’t new; instead the IRS adopted changes that were issued in previous pieces of legislation, such as the Tax Cuts and Jobs Act, the Bipartisan Budget Act of 2018, and the Disaster Tax Relief and Airport/Airway Extension Act of 2017. The key takeaway from the proposed regulations is that the IRS has continued to chip away at some of the restrictions imposed by the tax code on hardship distributions.

Jerry sells widgets for the ACME Widget Company. Jerry is a hard-working employee who participates in the ACME Widget Company 401(k) Plan. Jerry also contributes annually to an IRA account at a local bank. The widget business is a fickle one. Some years Jerry can make up to $200,000, while in the down years he might only make $50,000. When Jerry’s income is high, he cannot deduct his IRA contribution because he is an active participant in his employer’s 401(k) plan. In those years, he makes nondeductible contributions to his IRA and diligently files Form 8606 to report them as such. In the slow years, when Jerry and his wife’s income is below the deductibility phase-out range for active participants, Jerry contributes to his IRA and takes the appropriate deduction on his taxes. Jerry maintains excellent records and knows exactly how much deductible vs. nondeductible money he has in his IRA.

Question: Hello Mr. Slott, Thanks for your educational broadcasts. I have run into something that might hold your interest. In two separate situations I have asked that retirement checks be made payable to an IRA at another large institution mailed FBO “my name” then mailed to me. One is IRA to IRA, the other is Qualified retirement plan by a former employer to an IRA. In both cases the sender has wanted to term the distribution as a rollover. I was able to get the coding on one changed after the fact (with much ado) and have not yet done the other. The IRS is clear that these are NOT rollovers: IRS publication 590-A: https://www.irs.gov/publications/p590a#en_US_2017_publink1000230589 “A transfer of funds in your traditional IRA from one trustee directly to another, either at your request or at the trustee's request, isn’t a rollover. This includes the situation where the current trustee issues a check to the new trustee but gives it to you to deposit. Because there is no distribution to you, the transfer is tax free. Because it isn’t a rollover, it isn’t affected by the 1-year waiting period required between rollovers.”

I get the same question every year at year end. “My client has an illiquid IRA and can’t take his RMD. Can we just write a note to IRS explaining the problem?” Every year my answer is the same. “NO.” What is an RMD? It is a required minimum distribution. What does required mean? From dictionary.com: “to call for or exact as obligatory; ordain: The law requires annual income-tax returns.” In other words, it is something you must do; you cannot get out of it.

If you are considering converting an IRA to a Roth IRA in 2018, time is quickly running out. Here are 5 things you need to know when making a decision: 1. The Deadline - The deadline for a 2018 conversion is the end of the calendar year. There is a common misconception that a conversion can be done up to the client’s tax-filing deadline. That is NOT the case. There is no such thing as a prior-year conversion. The distribution must be taken in 2018 and reported on a 2018 Form 1099-R. It is best not to wait until the last minute. Be sure to leave enough time to complete the transaction.

Question: Mr. Slott, My spouse turned 70 on June 27th, 2018, so in December 2018 she will be 70 ½. She would like to complete a Qualified Charitable Distribution (QCD). Does the QCD need to be dated from December 27 to December 31, 2018 in order to take advantage of the favorable tax treatment for tax year 2018? Or, does she have all of calendar year 2019 to disburse her 2018 (and of course 2019 QCD) to meet the RMD requirements? Thank you for your advice. Ron

One piece of advice we commonly reiterate is, when you inherit an IRA or other retirement plan asset, touch nothing! That’s because many transactions cannot be undone, and the IRS rarely grants relief simply because the taxpayer misunderstood the tax rules. That said, you don’t want to remain stagnant forever. We were reminded of this in a recent private letter ruling approving a proactive approach by trust beneficiaries that saved the stretch distribution.

It turns out the Grinch stirs up a blizzard of trouble beyond stealing Christmas trees and presents from the innocent Whos down in Whoville. That candy cane he slipped out of Cindy Lou’s fingers? Child’s play. The breadcrumb he stole from the hungry Who mouse? Just the tip of his naughty iceberg of misdeeds and bad retirement advice. He’s an account-churning, RMD-avoiding, tax-scheming thief! An excess-contributing, high-pressure selling, rollover cheat! Oh, you ARE a mean one, Mr. Grinch. In an effort to protect the other Whos in Whoville, we share the top 3 most foul Grinch-recommended year-end IRA strategies that unequivocally, unmistakably and inevitably will NOT work:

Good morning! I am hoping you can provide some direction for an issue we have encountered. In December of 2016, we changed our broker-dealer. A particular client had not completed the transfer paperwork and had to mail a check to the IRA custodian directly for their 2016 contribution. The client had mailed the check prior to April 18, 2017, which was the deadline for the 2016 IRA contribution. The check was dated for 04/18/2017. The custodian has incorrectly coded the check for the current year (2017), and it should have been for prior year 2016. The custodian is not allowing the coding to be corrected, which the client is stating they are now subject to fines. Is there a way this client can dispute this issue, or can you please offer any advice? Thank you!

Twenty-six states have adopted revocation-on-divorce statutes similar to each other, and these statutes are impacting court decisions.