The Slott Report

Ivan is an inventor at heart, but he is stuck in an office at a job he does not particularly care for. Ivan constantly daydreams about starting his own company and improving everyday life with his inventions. For 20 years Ivan funds his 401(k) and tinkers with his creations when he gets home from work. With a burst of inspiration, Ivan invents the widget. He thinks the widget will transform the world. At age 50, Ivan strongly considers quitting his job and starting his own business. However, he needs capital to market and mass-produce the widget. Ivan’s only savings is his 401(k) at the job he doesn’t enjoy. Ivan could roll the 401(k) into an IRA and take a withdrawal, but this would result in taxes and a 10% penalty because Ivan is under 59 ½.

Question: In 2017, I opened a Roth IRA through my company. Being over 65, I mistakenly thought I could convert Traditional IRA funds to the Roth if I paid tax on the rollover amount. In August 2018, I had Schwab roll $50,000 into my Roth from my traditional IRA. This month (February 2019) when doing my 2018 taxes, I realized that conversions are not allowed in 2018, and withdrawals are not allowed from a Roth younger than 5 years old. What are my options for undoing this situation without paying a 6% yearly penalty? I am prepared to pay income tax on the amount. Thank You Chris Answer: Chris, Assuming I understand your terminology, I think I have some good news for you! First, you did NOT make a mistake. Converting Traditional IRA funds to a Roth IRA is certainly still allowed and is a great estate planning tool for the right people.

There are many gaps. Generation gap, stop-gap, The Gap Band. In baseball you can hit into the gap. Football linemen have an A-gap, B-gap and C-gap to concern themselves with. Of course, there is the Cumberland Gap. And there is a very important gap to consider when dealing with IRAs – the “Gap Period.” The gap period begins on the date of death of an IRA owner and ends on September 30 of the following year. A significant amount of planning activity can, and should, take place within this window, including: Post-Death Distributions (i.e. “Cash-outs”): If a charity is named as an IRA beneficiary, there is a good chance they will want the money as soon as possible. The same can be said for an individual who does not care to stretch the IRA and would prefer a lump sum payout. These cash-outs should be completed during the gap period.

Question: If I convert Trad IRA funds to a Roth IRA, does the ratio of After-Tax Contribution to Total IRA holdings include 401k holdings or only IRA holdings.

If you have an IRA, you may have heard the term “required beginning date” or “RBD.” This is an important date that every IRA owner should understand. The significance of the RBD is not limited to IRA owners. It is a critical date for IRA beneficiaries as well. Here are 10 things you need know about the RBD: 1. The RBD for an IRA owner is the date by which the first required minimum distribution (RMD) must be taken. 2. For IRA owners, the RBD is always April 1 of the year following the year they reach age 70 1/2. There is no exception to this rule for IRAs. 3. There are a few exceptions to the April 1 RBD for plan participants. These include the “still working” exception for employer plans and the “old money” exception for 403(b)s. These exceptions do not apply to IRAs.

Question: Hello Ed, I have an elderly client in his 80’s, not in the best of health. He has named his spouse (also in her 80’s) along with his 4 children as primary beneficiaries of his IRA. That said, I know the 4 children will have to establish inherited IRA’s – and keep them in such an account forever, receiving RMD’s at the single life table rate. However, is there some special handling that needs to be done by his spouse (who also has her own IRA and of course is receiving her own RMD’s) – since she is not the sole primary beneficiary listed – or should it just be a straight forward spousal rollover of her portion into her own IRA??? Thank you! Mike Answer: Mike: You have a good understanding of the rules and issues. The key to taking advantage of all the rules is to split the account. Technically, it doesn’t have to be done until December 31st of the year following death, but you could have the client do so now. By splitting the account now, we avoid the post-death deadline, each beneficiary gets to use their own life expectancy for post-death RMDs, and the spouse can execute the spousal rollover (if advisable).

When it comes to 401(k) plans, I feel like the Johnny Cash lyric…“I’ve been everywhere, man.” I’ve wholesaled record keeping platforms to financial advisors and sold direct to business owners. I’ve taught novice investors about their mutual fund options and crawled through the weeds of 401(k) plan design with CPAs. I’ve helped enroll participants, assisted advisors with fund selection, worked for a third party administrator (TPA), and participated in 401(k) plans myself. Despite the popularity of retirement plans, understanding how the core pieces fit together remains a mystery to most. In order to explain the moving parts to those looking to implement a new plan, I fashioned an analogy called: “So You Want to Throw a 401(k) House Party.”

So, you want to invest your IRA money in real estate? Every so often we get this question from advisors wondering what they should look out for. Under the tax code, real estate is a permissible investment for IRAs. However, that doesn’t mean it doesn’t carry its own concerns which should cause you to think twice before jumping in. Below are some things you should take into account before using IRA money to purchase real estate. IRA Custodial Document – Even though the investment is perfectly legal, you need to check the custodial document before making the investment. That’s because IRA custodians can prohibit their accounts from holding real estate. In fact, many do because of the concerns mentioned herein. Thus, investing IRA money in real estate will usually call for a self-directed IRA. Even in this case you still must check the custodial agreement. If your IRA document contains this restriction and you ignore it and invest in real property, you can end up with a taxable event and lose your retirement savings.

Question: Client passed in the middle of December 2018, but did not take her RMD. We are setting up beneficiary IRA accounts. We will be moving assets over to the beneficiary IRA accounts and then the beneficiary will take the RMD distribution. Should they take the 2018 distribution that was due and then take an additional distribution during 2019 based on their life expectancy? Should they do anything to explain the 2018 RMD taken in 2019? Thank You Kathy Answer: Kathy, Based on the wording of your question, I am assuming the beneficiaries of the IRA are non-spouse beneficiaries and are younger than the original account owner. If this is the case, then Step One is to take her RMD for 2018. These funds will be payable to the beneficiaries. Since the 2018 RMD was not taken by December 31 of last year, it will be a missed RMD and potentially subject to a 50% penalty. The beneficiary pays the penalty by filing Form 5329 as an attachment to their federal income tax return.

Not all contributions to IRAs belong there. When a contribution is not permitted in an IRA, it is an excess contribution and needs to be fixed. The bad news is that excess contributions happen easily and often. The good news is that if you properly correct the contribution you can avoid the excess contribution penalty. October 15 Deadline When it comes to the timing of an excess contribution correction, the key deadline is October 15 of the year following the year for which the excess contribution is made. The statutory deadline is actually the tax-filing deadline including extensions. However, the IRS has said that the applicable deadline for taxpayers who file a timely return is six months after the due date for filing the tax return, excluding extensions (October 15 of the year following the year for which the contribution was made). Why is this date so important? A 6% penalty applies to excess contributions. This penalty is not a one-and-done thing. It will apply every year that an excess contribution remains in the IRA. The only way to avoid the 6% penalty when an excess contribution occurs is to correct it by the October 15 deadline.