The Slott Report

Great work you all do. Been a reader of Ed for a long time. How would this scenario work? New client of mine's husband passed away in 2019 and he had not taken his RMD. The plan was to transfer the account to my firm and take the RMD when it got to my firm as there was plenty of time. However, the insurance company kept rejecting the transfer paperwork (as they did not tell the client everything they needed to submit).

When a person under the age of 59 ½ takes a withdrawal from their IRA or company plan - like a 401(k) – there is a 10% penalty. However, this penalty can be avoided if the withdrawal qualifies for an exception. Some exceptions apply to both IRAs and plans, some to plans only, and some to IRAs only. With the craziness that is our current world, the three IRA-only exceptions (including SEP and SIMPLE plans) may provide a lifeline for those in need. A general description of each is as follows:

The year 2020 has been a challenging one. With coronavirus cases rising in most of the country and economic relief stalled in Congress, many individuals may be looking to find funds to pay urgent bills. One possibility is a coronavirus-related distribution (CRD). While the first phase of the pandemic may be gone, the economic turmoil is still with us and so are CRDs. CRDs are still available through December 30, 2020. These are distributions, up to $100,000, from a company plan or IRA made anytime during 2020 (through December 30) to affected individuals.

Question: Our estate planning attorney prepared trust documents a few years ago and he advised us to name the trust as a beneficiary. This was done after discussion with him regarding a situation in case our son(s) divorce their wives. The trust is prepared so that our sons are designated beneficiaries. I've been reading your Slott Report article that advises against naming a trust as IRA beneficiary. Please let me know how to make sure half of the inherited IRA funds don't go to our son's divorced spouse. Thanks in advance.

The October 19, 2020 Slott Report article, "Don't Overlook After-Tax Contributions!," explained how after-tax contributions in company plans work and discussed the dollar limits on them. This article will explain how distributions of after-tax contributions are taxed and can be rolled over separately. If you have both pre-tax deferrals and after-tax contributions in your 401(k), you can’t just take out your after-tax funds to avoid paying taxes on the withdrawal. Instead, a pro-rata rule treats part of your distribution as taxable.

Trick-or-treating in the time of a pandemic is a challenge. Social distancing while handing out candy requires some creativity. The Slott Report has elected to place a big bowl of random treats in front of our house for the kids to pick from. We bought a lot of candy, so feel free to take more than one… Twix. Do not name your estate as your IRA beneficiary.

Question: Hello, If an individual has a solo 401(k), is this considered a "retirement plan at work" that would limit the deductibility of IRA contributions? Thanks! Susan Answer: Hi Susan, Being an active participant in a retirement plan for the year can limit your ability to deduct your traditional IRA contribution, depending on your income. Participating in a solo 401(k) would count as active participation for this purpose.

For many people, 2020 has meant leaving a job. Some jobs have disappeared. Some workers are taking early retirement. This means that many workers are receiving distributions from employer plans. Many individuals may assume that the right move is to roll over those retirement funds to an IRA. Not so fast! For many people, a rollover will be a smart decision. However, don’t assume that is always the way to go. In some cases, as strange as it may sound, taking a lump sum distribution and paying taxes is a smart choice. You may be wondering how that could be possible. Well, a tax break called Net Unrealized Appreciation (NUA) may make taking that lump sum distribution a good choice in 2020.

With the popularity of Roth 401(k) contributions, after-tax employee contributions have gotten short shrift. But, if your plan offers them, after-tax contributions are worth considering because they can significantly boost your retirement savings. What are they? After-tax contributions are elective deferrals made from already-taxed salary. You make after-tax contributions to your plan the same way you make pre-tax or Roth contributions (if offered). Unlike earnings on Roth 401(k) contributions, earnings on after-tax contributions are always taxable.

Question: An 85-year-old died in 2020 and left his IRA to his 53-year-old son. Father did not take 2020 $107,000 RMD. Does the son have to take it? Does the son have to take anything in first 9 years, including this RMD? Thank you. Answer: The CARES Act waived RMDs for IRAs in 2020. Even if an IRA owner dies in 2020, his year-of-death RMD still falls under the waiver. So, the $107,000 did not need to be withdrawn by the father, and it does not need to be withdrawn by his son beneficiary.