Market Review and Outlook

Ian Berger, JD
IRA Analyst

Here’s something you can only find in the Internal Revenue Code: Starting in 2025, there will be not one, not two, but three different catch-up limits for older SIMPLE IRA participants.

Like IRAs and workplace plans like 401(k)s, SIMPLE IRAs allow annual elective deferrals up to a dollar limit and “catch-up” contributions for those who reach age 50 or older by the end of the year. Both of these limits are indexed for inflation. For 2024, the regular elective dollar limit is $16,000, and the catch-up limit is $3,500 – for a total limit of $19,500. For 2025, the regular elective deferral limit increases to $16,500, but the catch-up remains $3,500 – for a total of $20,000.

But Congress could not leave well enough alone. Starting this year, the SECURE 2.0 legislation bumped up both of these limits by 10% for many – but not all – SIMPLE IRA plans. The 10% bonus applies to plans sponsored by companies with 25 or fewer employees – which includes most SIMPLE plans. But it also applies to companies with more than 25 employees if the company agrees to increase its SIMPLE IRA employer contribution to a level higher than usually required. (If the employer matches deferrals, the match must be up to 4% of pay instead of the usual 3% of pay. If the employer contributes to all eligible employees, the contribution must be 3% of pay instead of the usual 2%.) The 10% bonus boosted the 2024 regular deferral limit to $17,600 and the catch-up limit to $3,850 – for a total limit of $21,450. Both limits are indexed for inflation, but because of indexing rules, they will remain $17,600/$3,850 for 2025.

Adding even more complexity to the mix, starting in 2025 SIMPLE IRA participants turning 60, 61, 62 or 63 by the end of a calendar year can make an even higher catch-up contribution for that year. This “super catch-up” is $5,250 (150% of $3,500 – the 2025 regular catch-up limit.)

So, if you’re an older SIMPLE IRA plan participant, where does that leave you for 2025 (besides confused)? Assuming your plan already allows the standard $3,500 age 50-or-older catch-up (as most do), here are the rules for increased catch-ups for 2025:

• If you’ll be between ages 50 and 59 OR age 64 or older on December 31, 2025 and your company has 25 or fewer employees, you can defer up to $3,850 of catch-ups (on top of regular deferrals of $17,600).
• If you’ll be between ages 50 and 59 OR age 64 or older on December 31, 2025 and your company has more than 25 employees, you’ll be eligible for catch-ups up to $3,850 (on top of regular deferrals of $16,500) only if your employer elects to make a higher-than-usual company contribution (as outlined above). If your employer doesn’t, your catch-up limit will be the standard $3,500 (on top of regular deferrals of $16,500).

• If you’ll be between ages 60 and 63 on December 31, 2025, you can defer up to $5,250 of catch-ups (on top of regular deferrals of either $17,600 or $16,500). It doesn’t matter how many employees work for your company or if the plan offers the higher company contribution.

SIMPLE, isn’t it?

https://irahelp.com/slottreport/nothing-simple-about-it-3-different-catch-up-limits-for-2025/

By Sarah Brenner, JD
Director of Retirement Education

Health Savings Accounts (HSAs) continue to become more popular. If you have a qualifying high deductible health plan, you may make deductible contributions to an HSA. Then, you can take tax-free distributions to pay for qualified medical expenses. Here is what you need to know about taking tax-free HSA distributions.

What Are Qualified Medical Expenses?

Qualified medical expenses are more than just doctor bills. Qualified medical expenses include those costs that would generally qualify for the medical expense deduction under the Tax Code. This means you can take a tax-free distribution from your HSA to pay not only medical expenses like doctor and hospital bills, but also medical supplies, prescriptions co-payments, dental care, vision services, and chiropractic expenses. You can take tax-free distributions from your HSA to pay for your spouse or child’s medical expenses, even if they are not covered by your high deductible health insurance plan.

Reimbursing Expenses from Previous Years

You can take a tax and penalty-free distributions from your HSA in 2024 to pay for medical expenses in a previous year, as long as the expenses were incurred after you established your HSA. That means you do not have to make an HSA withdrawal every time you have a medical expense. You can pay that expense from your pocket, and let your account grow, and decide to reimburse yourself in a later tax year.

Even if you no longer have a high deductible health plan and you are no longer contributing to your HSA, you can keep the HSA and continue to take tax-free distributions from your HSA to pay for your qualified medical expenses for you, your spouse, and your dependents.

Special Benefits at Age 65

You cannot contribute to an HSA once you are enrolled in Medicare. However, you can keep your existing HSA, and you can still take tax-free distributions for qualified medical expenses.

When you reach age 65, you also gain some new benefits with your HSA. Generally, insurance premiums are not considered qualified medical expenses. However, after age 65 and enrollment in Medicare, certain insurance premiums can be paid tax-free with HSA distributions. You can take tax-free distributions from your HSA to pay for Medicare premiums, excluding Medigap.

Spouse HSA Beneficiaries

If your HSA beneficiary is your spouse, after your death, he or she can maintain the HSA in his or her own name and can continue to access the funds. Distributions for qualified medical expenses will be tax-free, just as they would have been to you.

https://irahelp.com/slottreport/tax-free-hsa-distributions/

By Andy Ives, CFP®, AIF®
IRA Analyst

Roth IRA conversions remain as popular as ever. However, based on some recent questions we’ve received, it is apparent that folks don’t fully understand all the nuances of this transaction. Here are some of the basic concepts and items of consideration:

There are no income limits on Roth IRA conversions. Yes, there are income limits when making a Roth IRA tax-year contribution, but not on a conversion. A person could make a million dollars and still do a Roth conversion. Or, a person could be unemployed with zero income and do a Roth conversion. (If you reside in a low-income bracket, just be sure you have the money available to pay the tax on the conversion.) Back in the day there were income limits for Roth conversions, but those limitations have long since been repealed.

There is also no limit on the amount that can be converted. If you want to eat all the taxes due on a multi-million-dollar Roth conversion, go for it. For some people, this could be a wise strategy. Maybe their ultimate goal is to provide a tax-free inheritance to their beneficiary? Maybe they are sick of taking required minimum distributions (RMDs) and just want to rip the tax band aid off? Whatever the case may be, a single, gigantic Roth conversion is perfectly acceptable. (There have been proposals to limit conversion amounts, but such ideas have fallen on deaf ears.)

There is no such thing as a “prior year conversion.” There are prior-year Roth IRA tax-year contributions, but not conversions. For a conversion to count for a particular year, the funds must leave the traditional IRA by December 31. For example, if an IRA owner takes a distribution from his traditional IRA on December 31, 2024, and deposits those funds into a Roth IRA in early 2025 (within 60 days of the distribution), that will count as a valid Roth conversion for 2024.

A Roth conversion will generate a Form 1099-R showing the distribution in Box 1, and a Form 5498 showing the Roth conversion in Box 3. Continuing with the example above; the distribution in late 2024 will create a Form 1099-R for 2024. But since the rollover/conversion “crossed tax years” and wasn’t completed until early 2025, Form 5498 won’t be generated until 2026! Proper tax preparation is paramount to ensure the IRS knows what happened.

An important fact for anyone under age 59 ½ who does a conversion: taxes withheld on a Roth IRA conversion do not get converted. There is no age limit or penalty for doing a Roth conversion – only taxes due. But if a younger person has the taxes withheld from the IRA when doing the conversion, those taxes withheld are an early withdrawal and will trigger a 10% penalty on the money you are sending to the IRS!

One final interesting Roth conversion item: ordering rules. We know that Roth IRAs can consist of three different types of dollars – contributions, conversions, and earnings. Ordering rules dictate that Roth distributions follow that exact sequence when paid out. A person always has access to their Roth IRA contributions tax- and penalty-free. But be careful. A person could make a bunch of contributions to a TRADITIONAL IRA, and subsequently have a large amount of earnings in that traditional IRA. If this IRA were to be converted to a Roth IRA, those dollars would no longer be “contributions and earnings,” but would now be converted dollars within the Roth. Their “character” changed as they are now slotted into the Roth conversion bucket within the Roth IRA.

The Roth IRA conversion conversation can go on for pages and pages. (I didn’t even mention the 5-year Roth clocks!) Be sure to consider the laundry list of Roth conversion items before haphazardly diving in.

https://irahelp.com/slottreport/roth-ira-conversion-considerations/

By Ian Berger, JD
IRA Analyst

The get-out-of-jail card that has allowed many IRA and plan beneficiaries to forego annual required minimum distributions (RMDs) is about to expire.

Here’s some background:

In its 2022 proposed regulations, the IRS took the position that a retirement account beneficiary subject to the 10-year payout rule who inherits from an IRA owner after the owner had reached his required beginning date (RBD) for starting RMDs must continue annual RMDs during the 10-year period. (The RBD for IRA owners is generally April 1 of the year following the year you turn age 73. The RBD for plan participants is usually April 1 of the year following the later of the year you turn 73 or the year you retire.)

The IRS said that annual RMDs were required on account of the tax code’s “at-least-as-rapidly rule.” This rule says that once RMDs have started, they must continue after death (although not in the same amount).

Because of the confusion this unexpected interpretation caused, the IRS waived RMDs for 2021-2024 for beneficiaries who would have been required to start annual RMDs. But in its July 18, 2024 final regs, the IRS doubled down on its reading of the “at-least-as-rapidly rule” and made clear that annual RMDs for beneficiaries subject to to the 10-year rule must begin in 2025 if the IRA or plan account holder died after his RBD.

So, how is the 2025 RMD calculated? Here’s an example:

In 2020, Sofia, who was then age 55, inherited an IRA from her father Alejandro, who died at age 80. Because Alejandro died after his RBD, Sofia must take annual RMDs starting in 2025. We must first go back and figure out what Sofia’s baseline life expectancy was in 2021 (the year following the year Alejandro died) when she was 56, and then subtract 1.0 for each subsequent year up to 2025. The life expectancy of a 56-year old under the IRS Single Life Table is 30.6. Subtracting 1.0 for each subsequent year gets us to a 26.6-year life expectancy for Sofia’s 2025 RMD. Her 2026 RMD will be 25.6 (26.6 – 1.0), her 2027 RMD will be 24.6 (25.6 – 1.0), and so on until 2030. By December 31, 2030, Sofia must empty out the remaining inherited IRA.

Even though beneficiaries subject to the 10-year rule don’t have to take annual RMDs for 2024, they may want to do so anyhow while federal tax rates are relatively low. Taking advantage of low tax rates is also a good reason why beneficiaries required to starting taking RMDs in 2025 should consider taking more than the RMD. Otherwise, they may be stuck with a large tax bill in the 10^th year when the account must be emptied. That’s especially true for beneficiaries like Sofia who, because of the delayed effective date of the annual RMD rule, will only have five yearly RMDs instead of nine.

https://irahelp.com/slottreport/annual-rmds-for-certain-beneficiaries-kick-in-soon/

By Ian Berger, JD
IRA Analyst

The get-out-of-jail card that has allowed many IRA and plan beneficiaries to forego annual required minimum distributions (RMDs) is about to expire.

Here’s some background:

In its 2022 proposed regulations, the IRS took the position that a retirement account beneficiary subject to the 10-year payout rule who inherits from an IRA owner after the owner had reached his required beginning date (RBD) for starting RMDs must continue annual RMDs during the 10-year period. (The RBD for IRA owners is generally April 1 of the year following the year you turn age 73. The RBD for plan participants is usually April 1 of the year following the later of the year you turn 73 or the year you retire.)

The IRS said that annual RMDs were required on account of the tax code’s “at-least-as-rapidly rule.” This rule says that once RMDs have started, they must continue after death (although not in the same amount).

Because of the confusion this unexpected interpretation caused, the IRS waived RMDs for 2021-2024 for beneficiaries who would have been required to start annual RMDs. But in its July 18, 2024 final regs, the IRS doubled down on its reading of the “at-least-as-rapidly rule” and made clear that annual RMDs for beneficiaries subject to to the 10-year rule must begin in 2025 if the IRA or plan account holder died after his RBD.

So, how is the 2025 RMD calculated? Here’s an example:

In 2020, Sofia, who was then age 55, inherited an IRA from her father Alejandro, who died at age 80. Because Alejandro died after his RBD, Sofia must take annual RMDs starting in 2025. We must first go back and figure out what Sofia’s baseline life expectancy was in 2021 (the year following the year Alejandro died) when she was 56, and then subtract 1.0 for each subsequent year up to 2025. The life expectancy of a 56-year old under the IRS Single Life Table is 30.6. Subtracting 1.0 for each subsequent year gets us to a 26.6-year life expectancy for Sofia’s 2025 RMD. Her 2026 RMD will be 25.6 (26.6 – 1.0), her 2027 RMD will be 24.6 (25.6 – 1.0), and so on until 2030. By December 31, 2030, Sofia must empty out the remaining inherited IRA.

Even though beneficiaries subject to the 10-year rule don’t have to take annual RMDs for 2024, they may want to do so anyhow while federal tax rates are relatively low. Taking advantage of low tax rates is also a good reason why beneficiaries required to starting taking RMDs in 2025 should consider taking more than the RMD. Otherwise, they may be stuck with a large tax bill in the 10^th year when the account must be emptied. That’s especially true for beneficiaries like Sofia who, because of the delayed effective date of the annual RMD rule, will only have five yearly RMDs instead of nine.

https://irahelp.com/slottreport/annual-rmds-for-certain-beneficiaries-kick-in-soon/

By Ian Berger, JD
IRA Expert

Question:

For a non-spousal inherited roth IRA account, there seems to be contradictory advice on different websites about when to take distributions. Some say there are annual required minimum distributions (RMDs) within the 10 years; others say you can wait until the 10th year for a lump sum. If you can wait and don’t need the money, wouldn’t it be wiser to wait until the last year since the money compounds tax free and the final lump sum distribution would also be tax-free?

Regards,

Jake

Answer:

Hi Jake,

Most non-spouse roth IRA beneficiaries are subject to the 10-year payout period. The annual RMD requirement in years 1-9 never applies in this situation. So, yes, it would be smart to leave the inherited roth account until the end of the 10-year period for maximum accumulation of tax-free growth. Instead of the 10-year rule, a non-spouse beneficiary who is an “eligible designated beneficiary” can also choose to have annual RMDs stretched over her lifetime.

Question:

Does the same 10-year rule that applies to other non-spouse beneficiaries also apply when the beneficiary is a trust? My mom passed away in 2023 and left a small IRA to a trust for my sister and me.

Phyllis

Answer:

Hi Phyllis,

Yes, assuming the trust document satisfies the rules for being a “see-through trust,” then the trust for you and your sister would be subject to the 10-year payout rule. (This also assumes the trust is a “conduit trust,” where the IRA funds are paid to the trust and then immediately out to the trust beneficiaries.) However, if your mother died after the required beginning date for starting RMDs, the trust would also need to start receiving annual RMDs from the inherited IRA starting in 2025 – and through 2033 – based on the life expectancy of whichever of you is the oldest. (Annual RMDs for 2024 were waived by the IRS.)

https://irahelp.com/slottreport/inherited-roth-iras-and-trust-beneficiary-payouts-todays-slott-report-mailbag/

By Sarah Brenner, JD
Director of Retirement Education

There is some good news for retirement savers! The IRS has released the cost-of-living adjustments (COLAs) for retirement accounts for 2025, and many of the dollar limit restrictions on retirement accounts will increase next year. In addition, new rules from the SECURE 2.0 Act also will bring more savings opportunities.

401(k) Plans

For savers looking to max out 401(k) contributions, higher contribution limits will be available for 2025. The salary deferral limit for employees who participate in 401(k) plans, including the Thrift Savings Plan, as well as 403(b) and 457(b) plans, is increased to $23,500, up from $23,000.

The catch-up contribution limit for those age 50 or over remains unchanged at $7,500. Under a change made in the SECURE 2.0 Act, a higher catch-up contribution limit applies starting in 2025 for individuals aged 60, 61, 62 and 63. This higher catch-up contribution limit is $11,250, instead of $7,500.

SEP and SIMPLE IRA Plans

The maximum SEP contribution will increase from $69,000 to $70,000. The cap on compensation that can be taken into account for calculating SEP and other retirement plan contributions is increased from $345,000 to $350,000.

SIMPLE salary deferral contributions will increase as well, going from $16,000 to $16,500 for 2025. The SECURE 2.0 Act allows individuals in certain SIMPLE plans, including those sponsored by companies with 25 or fewer employees, to contribute a higher amount. For 2025, this higher amount remains $17,600.

The catch-up contribution limit that applies for individuals aged 50 and over who participate in a SIMPLE plan remains $3,500 for 2025. Under a change made in the SECURE 2.0 Act, a higher catch-up limit applies for employees aged 50 and over who participate in certain SIMPLE plans, including those sponsored by companies with 25 or fewer employees. For 2025, this limit remains $3,850. Under another change from the SECURE 2.0 Act, an even higher catch-up contribution limit applies starting in 2025 for employees aged 60, 61, 62 and 63. This higher catch-up contribution limit is $5,250.

IRA Contributions

The IRA contribution limit will remain at $7,000 for 2025. The $1,000 IRA catch- up contribution is now indexed for inflation but remains unchanged for 2025. This will again allow those who are aged 50 or over to again contribute $8,000 to an IRA for 2025. The phase-out range for savers making contributions to a Roth IRA is increased to $150,000-$165,000 for single filers, up from $146,000-$161,000. For those who are married filing jointly, the income phase-out range is increased to $236,000-$246,000, up from $230,000-$240,000.

Phaseout ranges for active participants in employer plans looking to make deductible traditional IRA contributions have also been increased. For single individuals covered by an employer retirement plan, the phase-out range is $79,000-$89,000 for 2025, up from $77,000-$87,000. For married couples filing jointly, if the spouse making the IRA contribution is covered by an employer retirement plan, the phase-out range is increased to $126,000- $146,000, up from $123,000-$143,000. For those not covered by an employer retirement plan but are married to someone who is covered, the phase-out range is increased to $236,000-$246,000, up from $230,000-$240,000.

More details on the COLAs for 2025 can be found at https://www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000

https://irahelp.com/slottreport/401k-contribution-limits-increase-for-2025/

By Andy Ives, CFP®, AIF®
IRA Analyst

Yes, you read that title correctly. This rule was confirmed in the 2024 final SECURE Act regulations, released this past July. If a person has multiple IRAs, even if they are held at different custodians, the total aggregated IRA required minimum distribution (RMD) must be withdrawn before any Roth IRA conversion (or 60-day rollover) can be completed. [This does NOT include RMDs from work plans like a 401(k).]

Aggregation rules tell us that RMDs for each IRA must be calculated separately, but the aggregated total may be taken from any one or more of a person’s IRAs. The first dollars distributed from an IRA in a year when RMDs are due are considered the RMD. In addition, we know that RMDs cannot be rolled over or converted. Ergo, the RMD must be taken prior to any conversion – sequencing matters.

Example: Arnold (age 80; Uniform Lifetime Table factor of 20.2) has three IRAs held at three different custodians. The total balances and RMDs (rounded up) for each IRA are as follows:

IRA #1:   $100,000 year-end balance; RMD: $4,951

IRA #2:   $300,000 year-end balance; RMD: $14,852

IRA #3:   $450,000 year-end balance; RMD: $22,278

Arnold’s total aggregated RMD is $42,081. He can split this up any way he chooses between his three IRAs. He must take the total amount before the end of the year.

Prior to taking any distributions, Arnold tells his financial advisor that he would like to do a Roth conversion of IRA #1. Arnold must take the entire $42,081 before a Roth conversion can be processed with IRA #1 or any of his other IRAs. It is not good enough to ONLY take the $4,951 RMD from IRA #1 and then subsequently do a conversion within that same IRA #1.

If Arnold completes a Roth conversion before he satisfies his entire $42,081 RMD for the year, whatever remained of his RMD before the conversion is considered an excess contribution in the Roth IRA and must be removed.

For example, if Arnold took only the $4,951 RMD from IRA #1 and then did a $50,000 Roth conversion within that same IRA #1 (or any of the others), he would have an excess contribution in the Roth IRA of $37,130. This represents what Arnold had remaining on his total aggregated RMD ($42,081 – $4,951 = $37,130). Arnold would then have to follow the excess contribution corrective measures.

Again, sequencing matters. RMDs have always had to be taken before any Roth IRA conversion. The difference now is that ALL of a person’s total aggregated IRA RMDs must be withdrawn prior to a conversion – not just the RMD on the account being converted. Be careful here as this new rule flies in the face of how many RMDs and conversions have been processed in the past.

https://irahelp.com/slottreport/new-rule-all-ira-rmds-must-be-satisfied-prior-to-doing-a-roth-conversion/

By Andy Ives, CFP®, AIF®
IRA Analyst

QUESTION:

Hello,

I’m working with a retired client who has a sizable IRA. He set up a trust and named it as the beneficiary of the IRA, assuming that the trust would reduce or eliminate the income tax liability. Is this the case? Also, does a trust circumvent the 10-year rule?

Thanks!

ANSWER:

Naming a trust as IRA beneficiary does not reduce or eliminate the income tax on an inherited IRA. In fact, naming a trust as IRA beneficiary could exacerbate the tax liability. Trusts hit the top tax bracket (37% in 2024) when 2024 income exceeds just $15,200. Of course, the taxes could be shifted to the trust beneficiaries at their personal tax bracket, but the potential hit of the high trust tax rates still exists. Additionally, naming a trust does not circumvent the 10-year rule. In a worst case scenario, if the trust is designed improperly, the trust beneficiaries could be saddled with a 5-year payout. As we have said for years, do not name a trust as your IRA beneficiary unless there is a valid reason to do so and you know what you are doing.

QUESTION:

Has there been any clarification on the requirement and time frame for required minimum distributions (RMDs) for inherited IRAs during the 10-year rule? Specifically, for inherited IRAs where a parent had already started taking RMDs and the beneficiaries are not eligible designated beneficiaries? I know that the IRS delayed the need to take RMDs over the last few years, but has that been clarified yet for the future?

Thanks,

Mike

ANSWER:

Mike,

Yes, we do have guidance from the IRS on RMDs within the 10-year payout period. The SECURE Act dictates that when a non-eligible designated beneficiary (NEDB) inherits an IRA from a person who died after the required beginning date for starting RMDs, then annual RMDs must continue within the 10-year term. Since this rule created so much confusion, the IRS waived RMDs within the 10-year period for 2021, 2022, 2023 and 2024. For beneficiaries subject to RMDs within the 10-years, those RMDs must commence in 2025.

https://irahelp.com/slottreport/trusts-as-the-beneficiary-and-inherited-iras-todays-slott-report-mailbag/

By Ian Berger, JD
IRA Analyst

Don’t forget to turn your clocks back this weekend!

With that reminder comes another: pay attention to the Roth IRA distribution clocks. The key point to remember is that there are two different clocks, each used for a different purpose.

The First Clock: Is a Distribution of Converted Dollars Subject to Penalty?

When you do a Roth IRA conversion, you’re not subject to the 10% early distribution penalty at that time – even if you are under age 59 ½. But if you receive a distribution of converted Roth amounts when you’re under 59 ½, you could be hit with the penalty. This is the only time that the first five-year clock comes into play. This clock starts ticking on January 1 of the year of the conversion. If you’re under 59 ½ and take out the converted amount before the end of the five-year period that starts on that January 1, you’ll be penalized (assuming no penalty exception applies). If you do Roth conversions in different years, each conversion has its own five-year clock. But remember: If you don’t touch the converted funds until after age 59 ½, the first five-year clock will never come into play.

The Second Clock: Is a Distribution of Earnings Subject to Taxes?

The second clock is completely different than the first one. This clock helps determine whether earnings on Roth IRA contributions (and conversions) are taxable when distributed. Earnings avoid taxes if two conditions are met: The 5-year clock is satisfied, and you are at least age 59 ½ (or disabled or a first-time home buyer). When both conditions are satisfied, you’ve received what’s called a “qualified distribution.”

This second clock (which we like to refer to as the “5-year forever clock”) starts ticking on January 1 of the year of your first contribution or conversion to ANY Roth IRA. There is no separate 5-year forever clock for any subsequent contribution or conversion. If you take out earnings on your Roth contributions or conversions before the end of the five-year period that starts on that January 1, those earnings will be taxable. Getting the 5-year forever clock ticking is why it’s so important to open up a Roth IRA as early as possible – even if it’s funded with $10 or $20.

But don’t fret if your Roth IRA distribution is not “qualified.” Roth IRA ordering rules allow contributions and conversions to come out before earnings. This means that you can always receive a tax-free distribution of an amount equal to your Roth contributions and conversions without even reaching your earnings (in other words, before the second clock even comes into play).

Confused? Well, you do have an extra hour this weekend to figure it all out.

https://irahelp.com/slottreport/turn-your-clocks-back-and-pay-attention-to-the-roth-ira-clocks/

Sarah Brenner, JD
Director of Retirement Education

The year 2024 has flown by and the holidays season will soon be upon us. That means time is running out on year-end IRA deadlines. You will want to be sure to get the following three IRA-related tasks done sooner rather than later to avoid penalties and missed opportunities:

1.) Take your RMD. If you have a traditional IRA and turned age 74 or older this year, you will need to take a 2024 required minimum distribution (RMD) by the end of the year. If you turned 73 in 2024, you will have a little extra time to take your first RMD. Your deadline will be April 1, 2025. (But delaying your 2024 RMD into 2025 means you will have two RMDs due for 2025.) Those who must take an RMD for 2024 should not wait until the last minute. Many custodians have earlier internal deadlines to process these transactions, and waiting until the last minute can result in mistakes.

Many beneficiaries are required to take 2024 RMDs from inherited IRAs. If you inherited an IRA prior to 2020 or if you are an eligible designated beneficiary who inherited an IRA between 2020 and 2023, you will need to take an RMD for this year. Beneficiaries subject to the new 10-year payout rule under the SECURE Act catch a break. Due to all the confusion surrounding the 10-year rule, the IRS has said that a beneficiary subject to this rule is not required to take a 2024 RMD.

2.) Do a QCD. The holiday season is the time when many are feeling charitable. A good way to give if you have an IRA and are age 70 ½ or older is to do a qualified charitable distribution (QCD). This is a tax-free transfer directly from your IRA to the charity of your choice. The limit for 2024 is $105,000. A QCD can satisfy an RMD and is not included in modified adjusted gross income. There is no such thing as a “prior year QCD,” so if this strategy is of interest to you for this year, you will need to get it done by December 31, 2024.

3.) Convert to a Roth IRA. Tax rates are historically low, and those rates may not last much longer. This may be the ideal time for Roth IRA conversions. Time is running out though for 2024. The deadline for converting for this year is December 31, 2024.

https://irahelp.com/slottreport/3-ira-tasks-to-complete-by-the-end-of-2024/

By Andy Ives, CFP®, AIF®
IRA Analyst

This article is NOT about the “ghost rule” applicable to non-living beneficiaries. That payout rule applies when a non-person beneficiary (like an estate) inherits an IRA when the original owner died on or after his required beginning date (RBD). With the ghost rule, a non-person beneficiary is allowed to use the single life expectancy of the deceased individual to determine annual required minimum distributions (RMDs). As such, the name “ghost rule” seems wholly appropriate. (I most recently wrote about the ghost rule in the Slott Report on February 7, 2024, “Ghost vs. 5-Year: The Calendar Dictates.”)

No, this is something different. Since we are approaching Halloween, I thought I’d write about a unique beneficiary payout rule available to living, breathing people…one that has yet to be named. I hereby deem the following beneficiary option as…the “Zombie Rule.”

We know that the SECURE Act created five classes of eligible designated beneficiaries (EDBs). These include surviving spouses; minor children of the account owner; disabled individuals; chronically ill individuals; and individuals not more than 10 years younger than the IRA owner. (Those older than the IRA owner also qualify.) These EDBs are still permitted to take annual stretch RMDs over their own single life expectancy.

Spouse beneficiaries will typically do a spousal rollover into their own IRA, so we will disregard that EDB class. As for the next three EDB classes, more often than not they will be younger than the IRA owner when they inherit. (Obviously that is the case with minor children.)

But that final class of EDBs – individuals not more than 10 years younger than the IRA owner – is interesting. ANY beneficiary who is OLDER than the deceased IRA owner qualifies as an EDB under this classification. As an older EDB, that living, breathing person can choose which single life expectancy to use for calculating annual RMDs – their own age, or that of the deceased individual. Since the living, breathing beneficiary can inhabit the deceased person’s single life expectancy space, we have the Zombie Rule!

Example:

Ichabod dies at age 75, which is after his RBD. Ichabod’s beneficiary is his older sister Salem, age 80. Since Salem is not more than 10 years younger than Ichabod (she is older), she qualifies as an EDB and can stretch RMD payments. Since Ichabod died AFTER his RBD and Salem is older than Ichabod, Salem is permitted to use Ichabod’s single life expectancy to calculate her RMDs. Ichabod’s life expectancy in the year OF his death is 14.8 for a 75-year-old. For subsequent years, Salem subtracts 1 each year (starting with 13.8 for her first RMD calculation). As such, the inherited IRA should last for 14 years until Salem is 94.

By leveraging the Zombie Rule, Salem can minimize her RMDs and extend the period for which she must take distributions, thereby spreading the total taxes due over a longer time horizon. (While 94 may seem old to be taking inherited IRA RMDs…that witch may live to be 300!)

https://irahelp.com/slottreport/the-zombie-rule/

By Ian Berger, JD
IRA Analyst

The year is flying by, and before we know it 2025 will be here. With the arrival of the new year, several new provisions from the 2022 SECURE 2.0 law that impact retirement plans will become effective. One of the changes allows certain older participants in company savings plans and SIMPLE IRAs to make higher catch-up contributions.

401(k), 403(b) and Governmental 457(b) Plans

Under current law, employees in 401(k) plans (and 403(b) and governmental 457(b) plans) who attain age 50 by the end of a year can make salary deferrals in excess of the regular deferral limit. For example, in 2024, participants aged 50 or over can make an additional $7,500 on top of the regular $23,000 limit – for a total of $30,500. Starting in 2025, employees who turn 60, 61, 62 or 63 by the end of a year will be able to make even higher catch-up contributions for that year. So, for example, as long as you reach 60 by December 31, 2025, you’re eligible for the extra catch-up for that year – even if you’re only 59 when you make those deferrals.

How much is this special catch-up for 2025? Unfortunately, that’s not crystal clear. SECURE 2.0 says it’s the greater of $10,000 or 150% of the 2024 regular catch-up limit. The 2024 catch-up limit is $7,500, and 150% of that amount is $11,250. So, it would seem the 2025 special catch-up should be $11,250. But the Congressional summary of SECURE 2.0 suggests that Congress actually intended the 2025 special catch-up to be the greater of $10,000 or 150% of the 2025 regular catch-up limit. A draft bill in Congress, which hasn’t yet been introduced, would fix this error and several other SECURE 2.0 glitches. In any case, we know the 2025 catch-up for ages 60-63 will be at least $11,250.

Whatever the special catch-up for 2025 ends up being, it will be indexed for inflation starting in 2026.

SIMPLE IRAs

The higher catch-up also will be available starting in 2025 for SIMPLE IRA participants turning 60, 61, 62 or 63 by the end of the year. (The 2024 regular deferral limit is $16,000, and the age 50-or-older catch-up is $3,500 – for a total of $19,500). SECURE 2.0 is clear that the 2025 special catch-up is the greater of $5,000 or 150% of the 2025 regular catch-up limit. We won’t know the 2025 regular catch-up limit until the IRS announces all of the 2025 retirement dollar limits in a few weeks. However, the 2025 regular catch-up limit will certainly be the same as, or higher than, the 2024 $3,500 regular catch-up limit. So, the 2025 special catch-up will be at least $5,250 (150% x $3,500). Again, that amount will be adjusted for inflation starting in 2026.

Keep in mind that plans and SIMPLE IRAs don’t have to offer age 50-or-older catch-ups at all. If yours doesn’t – then the new special catch-up for ages 60-63 won’t be available.

https://irahelp.com/slottreport/higher-catch-up-contributions-available-for-certain-older-employees-starting-in-2025/

Ian Berger, JD
IRA Analyst

Question:

We have a client who has children from a previous marriage. Upon the husband’s death, he wants to make sure his current spouse has access to income from his IRA. But he also wants to make sure the remaining balance, when she passes, goes to his children from his first marriage and not to someone else, e.g., her children.

How best to make sure that happens?

Answer:

We do not normally recommend that a trust be named as IRA beneficiary, but this is one situation where naming a trust makes sense. The trust you would use is called a “QTIP” (qualified terminable interest property) trust. This is a special trust that is created to qualify for the estate tax marital deduction while giving the IRA owner (the trust creator) control over the trust principal (the IRA) after his death and after the death of the spouse. But QTIP trusts must also satisfy the IRA beneficiary distribution rules, and that can be difficult. For this reason, you should work with a estate attorney who is familiar with those rules.

To avoid the complications of a QTIP trust, another strategy you may consider is simply splitting the IRA. The client could decide how much he would like his wife to have and set up a separate IRA with her as beneficiary. The remainder could be left in the IRA with his children from his prior marriage as beneficiaries.

Question:

Hello, I attended the IRA workshop at National Harbor in July. I’ve searched through my materials, but I’m still confused about this situation.

My client has recently inherited an inherited IRA. Dad passed away a couple of months ago and he had an IRA that he inherited from his aunt (post 2020). The aunt was already taking RMDs. Dad was using the 10-year rule.

What are the minimum requirements for Dad’s 32 year-old daughter that just inherited this account?

Thank you much!!

Ricky

Answer:

Hi Ricky,

Your client (the daughter) is a successor beneficiary – the beneficiary of a beneficiary. All successor beneficiaries are subject to the 10-year payment rule. If, as in this case, the original beneficiary (Dad) was himself subject to the 10-year rule, the successor must empty the inherited account by the end of the original beneficiary’s 10-year period. In other words, the successor cannot tack on a new 10-year term of her own. Starting in 2025, the daughter must also receive annual required minimum distributions (RMDs) during those remaining years – based on Dad’s single life expectancy.

https://irahelp.com/slottreport/qtip-trusts-and-successor-beneficiaries-todays-slott-report-mailbag/

By Sarah Brenner, JD
Director of Retirement Education

October 15, 2024 has come and gone. This was the deadline for correcting 2023 excess IRA contributions without penalty. If you missed this opportunity, you may be wondering what your next steps should be. All is not lost! While you may not have avoided the excess contribution penalty for this year, you can still correct the issue for future years.

Excess IRA Contributions

Maybe your income ended up being higher than expected and you were ultimately ineligible for the Roth IRA contribution you made. Maybe you did not have earned income and contributed to an IRA anyway. Excess IRA contributions can happen in all sorts of ways. The cutoff for removing an excess IRA contribution for 2023 without penalty was October 15, 2024.

Two Options for a Fix After the Deadline

Regardless of the reason, if there is an excess IRA contribution it can still be corrected after the deadline. One way to fix the problem is to withdraw the contribution from the IRA. The good news is that only the excess contribution amount needs to be withdrawn. When correcting an excess before the October 15 deadline, any net income attributable (NIA) must also be withdrawn. However, in an odd tax code anomaly, since we are after the deadline, the NIA to the excess contribution can remain in the traditional or Roth IRA.

The bad news is that there will be a 6% excess contribution penalty, and IRS Form 5329 will need to be filed to pay it. Fixing the excess contribution is still the smart thing to do because if the excess contribution is not fixed – the 6% penalty will continue to accrue each year until either the excess is corrected, or time runs out under the new SECURE 2.0 statute of limitations (six years).

Besides withdrawal, there is another option to correct excess IRA contributions after the deadline. You can elect to carry forward the excess and apply the overage to future years. To use this method of correction, you must be eligible to make the contribution in the future year(s), and the 6% penalty must be paid each year until the original excess contribution amount is used up or the statute of limitations runs out.

https://irahelp.com/slottreport/you-missed-the-october-15-deadline-to-correct-an-excess-ira-contribution-now-what/

We have written about the net unrealized appreciation (NUA) tax strategy many times. Generally, after a lump sum distribution from the plan, the NUA tactic enables an eligible person to pay long term capital gains (LTCG) tax on the growth of company stock that occurred while the stock was in the plan. But there are finer points to NUA. Here are some more nuanced details:

Step-Up in Basis. NUA (meaning the appreciation that occurred in the plan prior to the lump sum distribution) never receives a step-up in basis. If the company stock is still held by the former plan participant upon his death, the beneficiary of that account will pay LTCG tax on the NUA no matter when the shares are sold. But what about any appreciation of the stock AFTER it was distributed from the plan? Appreciation after the lump sum plan distribution DOES receive a step-up in basis.

Example: John completed a proper NUA distribution 10 years ago of his company stock that was valued at $500,000. At that time, John paid ordinary income tax on the cost basis of his shares ($100,000) and he anticipated paying LTCG tax on the NUA of $400,000 when he sold the shares. John held all the shares until his death, when the total value had increased to $750,000. John’s beneficiary (his daughter Susan) immediately sells the shares. She will pay LTCG tax on the $400,000 of NUA. However, Susan will get a step-up in basis on the $250,000 of additional appreciation and owe no tax on that part of the transaction. (The original $100,000 is also tax-free as a return of basis.)

“Specific Identification Method.” Retirement plans will typically use an “average cost per share” to determine the NUA. Over the years, as the company stock price goes up and down, a plan participant will acquire shares at different price points with each salary deferral. However, the plan may not track all these different purchase prices. Instead, the plan could use the total purchase amount (the cost basis) vs. the current value of the stock. For example, if the current value of the stock within a 401(k) is $1,000,000, and if the total amount used to purchase the stock was $400,000, the NUA is $600,000. Average cost per share is cost basis ($400,000) divided by the total number of shares owned within the plan.

If a plan participant maintains detailed records and documents the specific historical stock purchase prices, the person could decide to only include the low-cost-basis shares in an NUA transaction. The high-cost-basis shares would be rolled to an IRA and excluded from the NUA calculation. By following the “specific identification method” and targeting the low-basis shares, a person could further maximize the NUA tax strategy.

In-Plan Roth Conversions: Caution! When an NUA “trigger” is hit, a plan participant does NOT have to act immediately on an NUA distribution. However, if the trigger is “activated” by certain transactions – like a normal distribution – the NUA lump sum withdrawal must occur within that same calendar year. If not, the trigger will be lost. Be careful! An in-plan Roth conversion is considered a distribution and WILL activate an NUA trigger.

10% Penalty for Those Under 55 Years Old. Assume a plan participant was under 55 at the time of separation of service. As such, she could not leverage the age-55 exception to avoid a 10% early withdrawal penalty. But there is a silver NUA lining. If she pursued an NUA transaction before age 59 ½ (and rolled over her non-stock plan funds), she would owe a 10% penalty ONLY ON THE COST BASIS of shares. If the appreciation is high enough, it could be advantageous to pay the 10% penalty on the cost basis to preserve the LTCG tax break on the NUA.

The NUA tax strategy is part art and part science. To maximize the benefits, understanding the different nuances is essential.

https://irahelp.com/slottreport/nuances-of-nua/

By Andy Ives, CFP®, AIF®
IRA Analyst

QUESTION:

Good afternoon,

If a client passed this year with four adult children inheriting equally, and each beneficiary is using the 10-year rule, how do they determine yearly required minimum distribution (RMD) calculations? Is it based on life expectancy or on a number that will empty the IRA within the 10 years?

Thank you for your help.

Sherry

ANSWER:

Sherry,

When RMDs apply within the 10-year period (and assuming the four inherited IRAs are properly established), each beneficiary will use his own age to determine the appropriate RMD. Use the beneficiary’s age in the year AFTER the year of death (2025) to determine the initial factor from the IRS Single Life Expectancy Table. Then, subtract 1 from that factor for years 2 – 9 of the 10 years, and deplete the entire account by the end of year 10 (12/31/34). A beneficiary can always take more than the RMD, which could be a wise tax-planning decision.

QUESTION:

My wife’s mom, age 96, died in June and still has about $6,000 in IRA assets. She had been taking required minimum distributions (RMDs). Do we need to take an RMD for her in 2024, or can the remaining funds pass to her beneficiaries?

Thanks,

Michael

ANSWER:

Michael,

All (or whatever portion remains) of your mother-in-law’s year-of-death RMD becomes the responsibility of the beneficiaries. To avoid a late penalty, Mom’s final RMD must be taken by December 31 of the year AFTER the year of death (12/31/25) – this is the new extended deadline. To help streamline tax reporting, a custodian will typically establish an inherited IRA for the beneficiary and pay the year-of-death RMD from that inherited account. Note that if there are multiple beneficiaries, the year-of-death RMD does not need to be spread equally among them. As long as the full amount is taken, the IRS will be satisfied.

https://irahelp.com/slottreport/the-10-year-rule-and-required-minimum-distributions-todays-slott-report-mailbag/

By Ian Berger, JD
IRA Analyst

Victims of Hurricane Helene have at least a glimmer of good news when it comes to their tax filings and ability to withdraw from their retirement accounts for disaster-related expenses.

The IRS usually postpones certain tax deadlines for individuals affected by federally-declared disaster areas.  On October 1, the IRS announced disaster tax relief for all individuals and businesses affected by Hurricane Helene, including the entire states of Alabama, Georgia, North Carolina and South Carolina and parts of Florida, Tennessee and Virginia. Generally, the IRS extended the deadline to file certain individual and business tax returns and make tax payments until May 1, 2025. It is likely the IRS will provide similar relief for victims of Hurricane Milton.

Meanwhile, as a result of SECURE 2.0, victims of federally declared-disasters (such as Hurricanes Helene and Milton) can withdraw up to $22,000 from their IRAs. If you are under age 59 ½, you won’t have to pay a 10% early distribution penalty on these withdrawals. Further, the taxable income on these withdrawals can be spread over three years, and the funds can be repaid over three years. Your employer plan may also allow these withdrawals. Even if your plan doesn’t allow disaster-relief withdrawals, you may be able to treat a hardship withdrawal (see the last paragraph of this article) as a disaster-relief withdrawal on your federal tax return – this would allow you to avoid the 10% penalty, spread income over three years and repay the withdrawal.

SECURE 2.0 also allows you to pay back a withdrawal you made prior to a disaster that you intended to use to purchase or construct a home if you are unable to use the funds because of the disaster. Finally, if you have a company plan that allows for loans, the plan can allow you to borrow a larger amount and give you additional time to repay outstanding loans.

You may also take penalty-free withdrawals from your IRA for “unforeseeable or immediate financial needs relating to personal or family emergencies.” Your employer plan may also allow emergency distributions. These withdrawals are limited to one per calendar year and are limited to $1,000. Once an emergency withdrawal is taken, no other emergency withdrawal can be taken in the following three years unless the original distribution is repaid or future salary deferrals (for plans) or contributions (for IRAs) exceed the amount of the original distribution.

Finally, if your plan allows, you may be able to take a hardship withdrawal from your account. The withdrawal must be for an “immediate and heavy financial need.” Most plans allow employees to automatically satisfy this requirement if their expense fits into one of seven “safe harbor” categories. One of those categories is disaster-related expenses and losses. There is no dollar limit on hardship withdrawals, but withdrawing pre-tax funds subjects you to tax and the 10% penalty if you are under 59 ½.

https://irahelp.com/slottreport/tax-filing-relief-and-retirement-account-withdrawal-options-for-hurricane-victims/

Sarah Brenner, JD
Director of Retirement Education

The recent final required minimum distribution (RMD) regulations include a new rule change that may be beneficial for IRA owners who name trusts as beneficiaries. In the new regulations, the IRS allows separate accounting for RMD purposes for more trusts. This can be helpful when a trust has beneficiaries who can potentially have different payout periods under the RMD rules.

Separate Accounting

When an IRA with multiple beneficiaries is split into separate inherited accounts for each beneficiary by December 31 of the year following the year of death, this is considered “separate accounting.” The RMD rules will then apply separately to each inherited IRA. For example, one beneficiary might be eligible to use a life expectancy payout on their inherited IRA while another would be required to use the 10-year rule. Without separate accounting – all of the beneficiaries would have to use the fastest payout method.

In the past, while separate accounting was allowed for multiple beneficiaries named directly on an IRA, it was never permitted for trusts. In many private letter rulings, when a single trust was named as the beneficiary and that trust was to split into three separate sub-trusts, the IRS allowed separate inherited IRAs to be created, one for each sub-trust, but did not allow separate account treatment for RMD purposes. To get around this issue, IRA owners could name separate trusts directly on the beneficiary form. In these situations, the IRS allowed the beneficiaries of sub-trusts to each use their own life expectancy. The difference was that each sub-trust was named as the beneficiary on the IRA beneficiary form, rather than the master trust.

The SECURE Act changed these rules in a limited way. It allowed separate accounting for certain special needs trusts called “applicable multi-beneficiary trusts.” While the SECURE Act limits most beneficiaries to a 10-year payout, special rules for these trusts for disabled or chronically ill beneficiaries allow RMDs to be paid from the IRA to the trust using the beneficiary’s single life expectancy, even if the trust has other beneficiaries who are not disabled or chronically ill.

New Rules

The final regulations expand this treatment beyond “applicable multi-beneficiary trusts” to permit separate accounting to be used for other see-through trusts – if certain requirements are met. Separate accounts may be used for “see-through” trusts if the terms of the trust provide that it is to be divided immediately upon the death of the account holder into separate shares for one or more trust beneficiaries.

To be considered “immediately divided upon death,” the following requirements must be met:

• the trust must be terminated;
• the separate interests of the trust beneficiaries must be held in separate trusts;
• and, there can be no discretion as to the extent to which the separate trusts will be entitled to receive post-death distributions.

In addition, the final regulations clarify that a trust will not fail the requirement to be “divided immediately upon death” if there are administrative delays, as long as any amounts received by the trust during the delay are allocated as if the trust had been divided on the date of the IRA owner’s death.

https://irahelp.com/slottreport/final-regulations-allow-separate-accounting-for-trusts/

By Andy Ives, CFP®, AIF®
IRA Analyst

When a traditional IRA owner wants to convert all or a portion of his account to a Roth IRA, he needs to think long and hard about the transaction. For example, some questions to consider:

1. When will this money be needed? Since the earnings on a conversion must remain untouched for 5 years AND the Roth IRA owner must be age 59 ½ before those earnings are tax-free, conversion is a long-term play.

2. What will future tax rates be? If they are anticipated to remain level or go up, then converting now could be a viable solution. But if rates are expected to go down, then it might be wise to reevaluate and possibly postpone a conversion.

3. Where will the money come from to pay the taxes on the conversion? It is often recommended that a person pay the taxes from another source, other than having taxes withheld from the IRA. This way the full amount can begin to grow tax-free.

Why are these foundational questions so important? Because there is no going back. As soon as you hit ENTER on your computer, or as soon as your financial advisor submits the transaction, the deed is done. It cannot be unwound. Recharacterization of a Roth conversion is off the table. (Congress did away with it back in 2018.) Whatever consequences that follow a conversion must be dealt with. Since a Roth conversion is such a major decision, and since conversions are so popular, the common advice is, “Be sure this is what you want to do, because recharacterization is no longer an option.”

This is 100% true – recharacterization is no longer allowed. That is, as it pertains to Roth conversions.

HOWEVER, recharacterization of a traditional IRA or Roth IRA CONTRIBUTION is still available. This is a common misunderstanding. Yes, an unwanted or ineligible contribution to one type of IRA can be recharacterized (changed) to another type of IRA. A traditional IRA contribution can be recharacterized to a Roth IRA, or vice versa. A contribution can be recharacterized for any reason as long as it can be a valid contribution to the other type of IRA.

Why would it be necessary to recharacterize a contribution? Maybe a person made a Roth IRA contribution, but then later in the year earned a big year-end bonus which pushed her over the Roth IRA phase-out limits ($230,000 – $240,000 for those married filing joint in 2024; $146,000 – $161,000 for single filers). Maybe a person made a traditional IRA contribution, but then learned that the contribution could not be deducted based on participation in a work plan.

Regardless of the reason, a traditional or Roth IRA contribution can still be recharacterized. But there is a deadline – October 15 of the year after the year for which the contribution is made. Beyond that drop-dead date, recharacterization is not available. Recognize that when processing a recharacterization, any earnings or losses applicable to the contribution must also be recharacterized. (For example, if you made a $5,000 contribution that was now worth $4,500, only $4,500 gets recharacterized.) Ultimately, it will be as if the original contribution was made to the proper IRA.

While the term “recharacterization” is often dismissed because it “does not exist anymore,” it is imperative to understand that recharacterization is alive and well…but only as it pertains to Roth or traditional IRA contributions.

https://irahelp.com/slottreport/recharacterization-still-exists/

By Ian Berger, JD
IRA Analyst

A big change made by the SECURE 2.0 Act of 2022 was adding a new statute of limitations (SOL) for the IRS to assess penalties for missed required minimum distributions (RMDs) and excess IRA contributions. On its face, it looks like the new SOL is 3 years for the missed RMD penalty and 6 years for the excess contribution penalty. But looks can be deceiving. In fact, for most of you, the new lookback period will be 6 years for both penalties.

The penalty for a missed RMD used to be 50% of the amount not taken. SECURE 2.0 reduced this penalty to 25%, and down to 10% if the missed RMD is timely corrected. This change was effective beginning in 2023. But the IRS can excuse this penalty if you ask for waiver. To do so, you must take the missed RMD and file Form 5329 with the IRS explaining that the RMD shortfall was due to reasonable error.

An excess IRA contribution is a contribution that exceeds the amount you can contribute to your IRA or Roth IRA in a year (e.g., making a Roth contribution when your income is too high or rolling over an RMD.) The penalty for an excess contribution is 6% for each year the excess amount stays in your account as of December 31. There is no penalty if you correct the excess contribution by October 15 of the year after the year for which you made it. The IRS cannot waive this penalty, unlike the penalty for a missed RMD.

Before 2022, most people had no SOL protection, and the IRS could go back indefinitely to assess both penalties. In SECURE 2.0, Congress tried to remedy this by providing new lookback periods for both penalties.

In a recent Tax Court decision, Couturier v. Commissioner, No. 19714-16; 162 T.C. No. 4, the Court ruled that the new 6-year SOL for the excess IRA contribution penalty is not retroactive. Although the Court didn’t address retroactivity of the 3-year missed RMD penalty SOL, the decision almost certainly applies to that penalty as well. This means there will continue to be no SOL protection for either penalty for years before 2022.

For 2022 and subsequent years, the lookback period for the missed RMD penalty for most of you is actually 6 years – not 3 years. The only way to keep a 3-year lookback period for any year is to file Form 5329 with the IRS each year indicating that no penalty is owed for that year and attach enough information to the form to show the IRS why you believed there was no missed RMD for that year. (This is sometimes called “zero-filing.”) But very few people will go to all the trouble to do this. Anyone who doesn’t will wind up with a 6-year lookback if the IRS hits them with a missed RMD penalty.

For 2022 and future years, the lookback period for the excess IRA contribution penalty starts out at 6 years. The only way to get that down to 3 years is to use the zero-filing strategy and provide the backup documentation showing why there was no excess contribution for that year. Once again, this is not something many people are willing to do.

The bottom line: Whether you miss an RMD or make an excess IRA contribution, if you don’t fix it the IRS will have 6 years to come after you.

https://irahelp.com/slottreport/surprising-news-about-the-new-statute-of-limitations-for-missed-rmds-and-excess-ira-contributions/

Sarah Brenner, JD
Director of Retirement Education

Question:

When an IRA owner dies after their required beginning date, can an eligible designated beneficiary choose either the life expectancy option or the 10-year payout rule?

Answer:

If an IRA owner dies on or after their required beginning date, the 10-year rule is not an option for an eligible designated beneficiary (EDB). The 10-year rule (for an EDB) is only available when the IRA owner dies before the required beginning date. After the required beginning date, the eligible designated beneficiary would have to take distributions over life expectancy.

Question:

Can an IRA beneficiary do a “partial” disclaimer or is a full disclaimer required? Thanks.

Answer:

A beneficiary can disclaim all or part of an IRA that they inherit. A full disclaimer of all the inherited IRA assets is not required.

https://irahelp.com/slottreport/eligible-designated-beneficiaries-and-disclaimers-todays-slott-report-mailbag/

By Sarah Brenner, JD
Director of Retirement Education

It happens. You have made a 2023 contribution to the wrong type of IRA. All is not lost. That contribution can be recharacterized. While recharacterization of Roth IRA conversions was eliminated by the Tax Cuts and Jobs Act, recharacterization of IRA contributions is still available and can be helpful in many situations you may find yourself in.

Maybe you contributed to a traditional IRA and later discovered the contribution was not deductible or maybe you contributed to a Roth IRA, not knowing that your income was above the limits for eligibility. You may recharacterize the nondeductible traditional IRA tax-year contribution to a Roth IRA and have tax-free instead of tax-deferred earnings if your income is within the Roth IRA contribution limits for the year. Or, if your Roth IRA contribution is an excess contribution because your income was too high, you may recharacterize that contribution to a traditional IRA because there are no income limits for traditional IRA contributions.

It’s still not too late to recharacterize your 2023 IRA contribution. The deadline for recharacterizing a 2023 tax year contribution is October 15, 2024 for taxpayers who timely file their 2023 federal income tax returns. This is true even if you do not have an extension. You may need to file an amended 2023 federal income tax return if you recharacterized after you have already filed.

If you decide that recharacterization is a good move for you, contact your IRA custodian. You will need to provide the custodian with some information to conduct the transaction such as the amount you would like to recharacterize and the date of the contribution.  Most IRA custodians can provide you with form to collect all the necessary information to complete a recharacterization. The IRA custodian will then directly move the funds you choose to recharacterize, along with the earnings or loss attributable, from the first IRA to the second IRA. This is a tax-free transaction but both IRAs report the transactions to you and the IRS. You will receive a 2024 Form 1099-R from the first IRA and a 2024 Form 5498 from the second IRA.

https://irahelp.com/slottreport/recharacterization-deadline-approaches/

By Andy Ives, CFP®, AIF®
IRA Analyst

When presenting a particular section of our training manual, I usually make the joke that, “if we were playing an acronym drinking game, we would all be on our way to a hangover.” The segment is titled: “Missed stretch IRA RMD by an EDB, when the IRA owner dies before the RBD.” This part of the manual discusses the automatic waiver of the missed RMD penalty in a certain situation, and the acronym soup is borderline comical. So that everyone knows which end is up, here is a spiked punch bowl of common retirement-account-related acronyms.

IRA: Individual retirement arrangement. (Not “account!”)

RMD: Required minimum distribution. Minimum amount that must be withdrawn from a retirement account each year after reaching a certain age.

RBD: Required beginning date (for starting RMDs). Generally, April 1 of the year after the year a person turns 73.

QLAC: Qualifying longevity annuity contract. An annuity whose value (up to $200,000) can be excluded from an IRA owner’s balance for RMD calculation purposes.

EDB: Eligible designated beneficiary. Category of beneficiary who may take stretch RMDs.

NEDB: Non eligible designated beneficiary. Category of beneficiary who gets the 10-year rule.

NDB: Non designated beneficiary. Category of beneficiary that includes “non-people,” like an estate or charity. Payout rules applicable to NEDBs are the 5-year rule or “ghost rule.”

ALAR: At least as rapidly. The rule dictating that when RMDs have begun, they must be continued by the beneficiary. ALAR is a function of frequency, not amount.

QCD: Qualified charitable distribution. A distribution from an IRA to a qualified charity, subject to an age requirement of 70 ½ or older.

CWA: Contemporaneous written acknowledgement. This is just a receipt for your QCD!

CGA: Charitable gift annuity. A one-time QCD of $53,000 (for 2024) can go to an entity like a CGA, CRAT (charitable remainder annuity trust), or CRUT (charitable remainder unitrust).

DAF: Donor advised fund. A QCD cannot be made to a DAF.

NUA: Net unrealized appreciation. Tax strategy used to pay long term capital gains on the appreciation of company stock. (Be sure to know all the NUA rules before proceeding.)

NIA: Net income attributable. The gain or loss on an excess IRA contribution.

QDRO: Qualified domestic relations order. Used to split a retirement plan after divorce.

SECURE Act: Setting Every Community Up for Retirement Enhancement Act.

I feel dizzy. Maybe I should go lie down and sleep it off.

https://irahelp.com/slottreport/ira-acronyms/

By Ian Berger, JD
IRA Analyst

Question:

I inherited an IRA from a younger deceased spouse who wasn’t required to take required minimum distributions (RMDs) until this year. Can I take advantage of the new section 327 rules under SECURE 2.0 since the RMDs haven’t commenced yet?

Answer:

Yes. The recently-released IRS proposed RMD regulations say that section 327 can be used by a surviving spouse who inherits before 2024 as long as the deceased IRA owner would have reached age 73 (the current first year for RMDs) in 2024 or later. The advantage of section 327 is that you can remain an IRA beneficiary (as opposed to doing a spousal rollover) and use the IRS Uniform Lifetime Table (and your age) to calculate RMDs. This will produce smaller RMDs than if you were using the IRS Single Life Table, which was required before section 327. An added benefit of being a spouse beneficiary is that these RMDs will not start until the deceased spouse would have been age 73. (As an alternative, you could elect to have the inherited IRA emptied by the end of the 10th year following the year your spouse died. No annual RMDs would be required in years 1-9.)

Question:

My father passed away in March of 2018 and I inherited his 401(k). I rolled over the 401(k) to an inherited IRA. Do I have to liquidate this IRA by the end of 2028?

Thank you.

Rick

Answer:

Hi Rick,

No. The 10-year payment rule for inherited IRAs applies to most non-spouse beneficiaries (including adult children) of IRA owners who die after 2019. Since your father died in 2018, you aren’t subject to the 10-year rule. You can continue taking annual RMDs over your single life expectancy.

https://irahelp.com/slottreport/new-spousal-beneficiary-rules-and-effective-date-of-10-year-rule-todays-slott-report-mailbag/

By Ian Berger, JD
IRA Analyst

If you were born in 1959, what is the first year that you must start taking required minimum distributions (RMDs)? That would seem like an easy question to answer, but because of a snafu by Congress, it isn’t quite so clear.

For many years, RMDs started at age 70 ½. Then, in the 2019 SECURE Act, Congress postponed the RMD age to 72 for people born on or after July 1, 1949. In the 2022 SECURE 2.0 Act, Congress delayed the first RMD year even further with the following language:

• The first RMD age is 73 for those born on or after January 1, 1951 and before January 1, 1960; and
• The first RMD age is 75 for those born on or after January 1, 1959.

It didn’t long for commentators to notice a drafting error in this rule. The glitch caused anyone born in 1959 to have two first RMD ages.

Example: Jason Alexander, who played George in Seinfeld,was born on September 23, 1959. Jason is covered by the first part of the rule, which would make 73 his first RMD age. But he is also covered by the second part, which would also make 75 his first RMD age.

Obviously, even George cannot have two RMD ages, so this error had to be fixed. Back in May 2023, four high-ranking members of Congress from both parties sent a letter to the IRS promising they would introduce legislation to correct this mistake and several others in SECURE 2.0.

But guess what? This promised corrective legislation hasn’t happened yet. So, the IRS stepped into the breach and decided it would fix the 1959 “ambiguity.” In the proposed RMD regulations issued on July 18, 2024, the IRS said the SECURE 2.0 rule should work as follows:

• The first RMD age is 73 for those born on or after January 1, 1951 and before January 1, 1960; and
• The first RMD age is 75 for those born on or after January 1, 1959 January 1, 1960.

With this fix, those born in 1959 would only have one RMD age: 73. And the RMD ages would be as follows:

However, it’s not entirely clear whether the IRS has the authority to make this correction. Earlier this year, the U.S. Supreme Court issued the Loper Bright Enterprises v. Raimondo decision, which gives judges more power to overturn IRS (and other governmental) regulations. Based on that decision, it is possible a judge could decide that only Congress has the power to fix its own mistake.

But for now, your best bet is to follow the RMD chart above.

https://irahelp.com/slottreport/whats-the-first-rmd-year-for-those-born-in-1959/

By Sarah Brenner, JD
Director of Retirement Education

If you take a distribution from your traditional IRA, in most cases you will owe taxes. The government wants to be sure those taxes are paid, so IRA distributions are subject to federal income tax withholding. The good news is that there is a lot of flexibility when it comes to withholding on your IRA distribution. Here is what you need to know.

How Withholding Works

Your IRA custodian is required to apply federal income tax withholding rules to a traditional IRA distribution when more than $200 is distributed from your IRA in a year. Roth IRA distributions generally are not subject to withholding. When you take a distribution from your IRA, the custodian must provide you with a withholding notice explaining the rules prior to the distribution.

Unless your IRA distribution is from an IRA annuity that has been annuitized, your withholding choices are to withhold 0%, 10%, or more than 10%. You can even choose to have 100% of your IRA distribution withheld! If you don’t choose, the choice will be made for you. If you don’t choose anything after being notified, the custodian must withhold 10%. You should be aware that the 10% rule even applies to distributions that are converted to Roth IRAs. Be sure to elect 0% withholding if you want to convert an entire traditional IRA distribution to a Roth IRA. If any amounts are withheld, they will not be considered to be converted to the Roth IRA.

Withholding applies differently to annuitized distributions from an IRA. For these distributions, withholding applies as if the payments were wages. You can elect out of withholding on distributions from your annuitized IRA.

How Much Should I Withhold?

Your IRA custodian is required to inform you about withholding, but the custodian isn’t required to tell you how much you should actually withhold. How much should be withheld from your IRA distribution is based on your overall tax situation. You should consider a number of factors, such as total anticipated income, deductions, credits and other withholdings.

You may be subject to penalties for not paying enough federal income tax during the year, either through withholding or estimated tax payments. Withholding is automatically treated as being paid in ratably, throughout the year. This can be a benefit for you if you take an IRA distribution late in the year and are concerned that you may not have made high enough quarterly payments. You can choose to withhold on the IRA distribution to make up the shortfall.

Some taxpayers mistakenly equate their withholding with the tax they owe, but that, of course, is not usually the case. For example, if you withhold 10% from your IRA distribution, that doesn’t necessarily mean you’ll owe 10% in taxes. You could owe 10%, but you could also owe less than 10% or, most likely more than 10% – potentially much more. For 2024, the federal 10% tax bracket only applies to taxable income from $0 to $11,600 for single filers and $0 to $23,200 for those married and filing joint returns. Therefore, withholding only 10% of an IRA distribution for federal income taxes could easily result in you owing additional amounts at tax time.

Withholding can be complicated. You will want to keep in mind that federal withholding is only part of the picture. Many states also require withholding on IRA distributions. If you have questions, you will want to discuss your situation with a knowledgeable financial advisor.

https://irahelp.com/slottreport/what-you-need-to-know-about-withholding-and-your-ira/

By Andy Ives, CFP®, AIF®

IRA Analyst

QUESTION:

I inherited a traditional IRA from my mother in 2024. She passed before her required beginning date (RBD.) I know that I fall under the 10-year rule. The question is, do I need to start required minimum distributions (RMDs) in 2024 and deplete the account by 2034, or can I wait until 2034 and deplete the entire account all at once?

Thank you,

Holly

ANSWER:

Holly,

Since your mother passed away before her RBD, she never officially “turned RMDs on.” Since she did not start RMDs, then RMDs do not apply within the 10-year period. As such, you can leave the inherited IRA untouched and take a lump sum distribution by the end of 2034 if you wish. (However, it may behoove you to gradually draw down the inherited IRA over the full 10-year period to avoid a big tax hit in year 10.)

QUESTION:

Some of my IRAs are Roth and some are traditional. If my RMD is $1,500, can I withdraw the $1,500 from my Roth IRA, or must I take it from a traditional IRA?

ANSWER:

Your RMD must be withdrawn from the traditional IRA, because that will generate a taxable distribution. The IRS gives us the opportunity to maintain a tax-deferred IRA until it’s time for RMDs. At that point, the IRS wants their tax dollars. Consequently, a distribution from a Roth IRA cannot qualify as your traditional IRA RMD.

https://irahelp.com/slottreport/required-minimum-distributions-todays-slott-report-mailbag-2/

By Andy Ives, CFP®, AIF®

IRA Analyst

Workplace retirement plans – like a 401(k) – can hold different types of dollars. Typically, a 401(k) will have a pre-tax bucket and a Roth bucket. Occasionally, a plan will have a third bucket to hold after-tax (non-Roth) money. When it comes time to roll all these plan dollars to an IRA, where should (and where can) the different dollars go?

Pre-Tax. Pre-tax salary 401(k) deferrals, employer matches, and any subsequent earnings on these dollars within the plan are typically rolled over to a traditional IRA. By rolling to a traditional IRA, the funds retain their tax-deferred status. Once in the traditional IRA, the former plan dollars and any future earnings avoid taxation until they are distributed.

But rolling pre-tax plan dollars to a traditional IRA is not required. A plan participant could roll all or a portion of his pre-tax 401(k) dollars directly to a Roth IRA, bypassing a traditional IRA completely. This transaction qualifies as a valid Roth conversion. (Some refer to this as a “mid-air conversion.”) The pre-tax plan dollars will then be taxable for the year of the rollover.

Roth. Roth 401(k) salary deferrals and earnings can only be rolled to a Roth IRA. Assuming the proper 5-year clocks and age 59 ½ rules are met, all Roth earnings from the plan (as well as future earnings within the Roth IRA) will be tax-free. Do NOT make the mistake of rolling Roth plan dollars to a traditional IRA. That is a “no-go zone.”

After-Tax (Non-Roth). After-tax 401(k) contributions are not available in every plan. But if they are, after-tax plan contributions are just that – after-tax dollars. However, these are not Roth funds. Meaning, earnings on these after-tax dollars are taxable. If your plan includes a bucket for after-tax dollars, understanding the implications of a future rollover is imperative.

Most 401(k) plans can separate after-tax contributions from their earnings. The after-tax contributions are typically rolled over to a Roth IRA. This qualifies as a tax-free conversion. The segregated earnings on the after-tax dollars are most often rolled to a traditional IRA. This makes sense as those after-tax earnings can then retain their tax-deferred status within the traditional IRA.

But routing the after-tax contributions to a Roth IRA via rollover and the after-tax earnings to a traditional IRA is not required. In fact, ALL of the dollars could be rolled to a traditional IRA or to a Roth, and there are consequences for each action.

Example: Robert has $50,000 of after-tax (non-Roth) contributions in his 401(k), and there are $20,000 of earnings associated with those contributions ($70,000 total). If Robert’s plan provider splits the money, a common recommendation is to roll the $50,000 to a Roth IRA (tax-free conversion) and the $20,000 to a traditional IRA. Another option is for Robert to roll the entire $70,000 to a Roth IRA. Since the $20,000 of earnings are pre-tax, those dollars would be taxable. A far-less-pleasant third option is to roll all $70,000 to a traditional IRA. Yes, the $20,000 would remain tax-deferred. However, the $50,000 would then be basis in the traditional IRA and must be accounted for. Meaning, the pro-rata rule is now introduced to all future distributions and conversions from Robert’s traditional IRA.

If you have different types of dollars within your 401(k), it is vital to know where each “bucket” should be sent via rollover and the ramifications of your decisions.

https://irahelp.com/slottreport/401k-to-ira-rollover-3-buckets/

By Ian Berger, JD
IRA Analyst

If you are making student loan repayments, you should ask your employer if it will match those payments in the company’s retirement plan. The SECURE 2.0 Act allows for matching contributions on “qualified student loan payments” (or “QSLPs”) beginning with plan fiscal years starting after December 31, 2023. (This is January 1, 2024 for most plans.) Matches on QSLPs are optional; plans are not required to offer them.

SECURE 2.0 lacked detail about how these matching contributions would work, and that made many employers reluctant to implement this new option. On August 19, 2024, the IRS issued Notice 2024-63. The Notice answered several pending questions about the matching contribution feature and gave employers flexibility in establishing and administering the feature. This guidance should spur more employers to offer the QSLP match.

A QSLP match may be provided by a 401(k) plan, a 403(b) plan, a governmental 457(b) plan or a SIMPLE IRA.

To be a QSLP, the payment must be a repayment of a loan incurred by the employee to pay for higher education expenses of the employee, his spouse, or his dependent. A loan is “incurred” if the employee has a legal obligation to repay it. If an employee cosigns a dependent’s loan, the employee must be making the payment in order for it to qualify as a QSLP. If the dependent is making the payment, the employee can’t have those payments matched.

The total amount of QSLPs made for a calendar year can’t exceed the annual deferral limit in effect for that year (for 401(k) 403(b) and 457(b) plans in 2024, $23,000, or $30,500 for age 50 or older) minus any elective deferrals made during that year.

Example: Caroline, age 40, participates in her company’s 401(k) plan which matches on QSLPs. During 2024, she has $15,000 of qualified student loan payments. She may only make elective deferrals up to $8,000 ($23,000 – $15,000) during 2024.

Employees must certify that the loan payment satisfies the QSLP requirements and must certify the amount of the loan payment, the date of the loan payment, and that the payment was made by the employee. The certification rules are user-friendly but complicated. Employees can self-certify all of these requirements, but there are other ways to comply. Check with the plan administrator or HR to see what level of certification is required by your plan.

The IRS Notice also says that the QSLP match must be available to all employees eligible to receive matches on elective deferrals. So, an employer can’t limit QSLP matches to loan payments for an employee’s own education, a particular degree program (such as a Bachelor of Arts) or attendance at a particular school. The reverse is also true: All employees eligible to receive matches on QSLPs must be eligible to receive matches on elective deferrals.

Finally, QSLP matching contributions must be made at the same rate, and under the same vesting schedule, as the plan’s regular matching contribution. If a plan imposes any eligibility condition on a QLSP match (such as requiring employees to be employed on the last day of the plan year to qualify), the same condition must apply to a regular match.

https://irahelp.com/slottreport/401k-plans-can-now-offer-matching-contributions-on-student-loan-payments/

Sarah Brenner, JD
Director of Retirement Education

Question:

Can I roll over a Roth 401(k) to an existing Roth IRA or does it need to be in its own separate account? When does the 5-year holding period begin for the Roth 401K rollover?

Thank you,

Elisabeth

Answer:

Hi Elisabeth,

A Roth 401(k) can be rolled into an existing Roth IRA. The funds do not have to be kept separate. The 5-year holding period for tax-free distributions of earnings will be the existing Roth IRA’s 5-year holding period. This 5-year holding period does not restart with the rollover from the plan.

Question:

Dear IRA Help:

I have already done one 60-day rollover from a qualified plan to my IRA within the last 12 months, and I would like to do another 60 day-rollover from the same qualified plan to the same IRA. My IRA custodian is claiming I am limited to one 60-day rollover per year from a qualified plan to an IRA.

Can I please have a clarification?

Sincerely,

Victor

Answer:

Hi Victor,

Good news! The once-per-year rollover rule to which you are referring does not apply to your situation. This rule limits 60-day rollovers between IRAs. You may only roll over one distribution from all of your IRAs within a 365-day period. However, this rule does not apply to rollovers from plans to IRAs. There is no limit on the number of plan-to-IRA rollovers that can be done within a 365-day period.

https://irahelp.com/slottreport/roth-401k-rollovers-and-the-once-per-year-rollover-rule-todays-slott-report-mailbag/

Sarah Brenner, JD
Director of Retirement Education

The new required minimum distribution (RMD) rules recently issued by the IRS include some good news for trusts named as retirement account beneficiaries. A documentation requirement (that tripped up many trustees resulting in a shorter payout period from the inherited account) has been loosened for plans and eliminated for IRAs.

See-Through Trusts

Only individuals who are named on the IRA beneficiary form (or named through the IRA custodial document if no beneficiary is named on the beneficiary form) can be designated beneficiaries. A trust is not an individual, so it cannot be a designated beneficiary. But if the trust qualifies as a “look through” or “see-through” trust, then the individual beneficiaries of the trust can qualify as designated beneficiaries for IRA distribution purposes. Meeting these requirements can allow a trust to use the 10-year payout period or, in some cases, even the stretch. Failing to meet the requirements outlined below can result in the payout period being reduced to five years.

New Rules

The final regulations keep the see-through trust concept. However, they simplify the documentation requirement for trusts that are beneficiaries of plan accounts, and do away with it entirely for trusts that are IRA beneficiaries.

Under the new rules, to qualify as a “see-through” trust for distribution purposes, the trust must meet the following requirements:

1. The trust is valid under state law or would be but for the fact that there is no corpus.

2. The trust is irrevocable, or the trust contains language to the effect it becomes irrevocable upon the death of the employee or IRA owner.

3. The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the employee’s or IRA owner’s benefit are identifiable.

4. OLD RULE: The required trust documentation must be provided by the trustee of the trust to the plan administrator no later than October 31 of the year following the year of the IRA owner’s death.

NEW RULE: The required documentation rules are simplified for trusts that are plan beneficiaries. A plan administrator can require the trustee to provide a list of trust beneficiaries with a description of the conditions on their entitlement instead of the actual trust document.

For trusts that are IRA beneficiaries, the documentation requirements are eliminated. A trustee of a see-through trust is NOT required to provide the trust documentation to an IRA custodian.

https://irahelp.com/slottreport/new-rules-loosen-or-eliminate-documentation-rules-for-see-through-trusts/

By Ian Berger, JD
IRA Analyst

Question:

Under IRS rules, if I am currently receiving required minimum distributions (RMDs) and die today, my non-spouse beneficiary has 10 years to pay out my IRA. If that beneficiary dies five years later (in August 2029), does the successor beneficiary have five years to continue to pay out RMDs, or does the 10-year period restart?

Thank you,

Annmarie

Answer:

Hi Annmarie,

The SECURE Act says that your beneficiary (assuming he is not an “eligible designated beneficiary”) must empty your inherited IRA by the end of the 10^th year following the year of your death. Your beneficiary must also take annual RMDs during years 1-9 of the 10-year period. If your beneficiary dies before the end of the 10 years, the successor beneficiary is subject to the same 10-year period as the original beneficiary (i.e., no restart). Annual RMDs must be continued during the remaining five years by the successor.

Question:

Hello!

We have a client with an inherited IRA subject to the 10-year rule. The client has some short-term expenses. According to the custodian, we can do a 60-day rollover back into his own traditional IRA from funds originally distributed from the inherited traditional IRA. However, I’m questioning this. Can you provide some insight?

Appreciate your time!
Matt

Answer:

Hi Matt,

It was smart of you to question this. The general rule is that a distribution from an inherited IRA may not be rolled over to the beneficiary’s own IRA. The only exception is for a surviving spouse beneficiary.

https://irahelp.com/slottreport/successor-beneficiaries-and-inherited-ira-rollovers-todays-slott-report-mailbag/

By Andy Ives, CFP®, AIF®
IRA Analyst

In my August 19 Slott Report (“Year of Death RMD – Deadline Extended!”), I wrote about the required beginning date, who takes the year-of-death required minimum distribution (RMD), and the deadline for taking that distribution. Today’s article focuses on an additional nuance of the year-of-death RMD – something created by the final regulations (released July 18, 2024) – that could make taking the year-of-death RMD a little clunky in some situations.

Aggregation rules tell us that a living person with multiple IRAs can calculate the annual RMD for each account, and then take the total RMD from any combination of their IRAs. This ability to aggregate lifetime RMDs across multiple IRA accounts impacts how beneficiaries can divide what remains of a year-of-death RMD.

If no distributions were taken from any IRA in the final year of the IRA owner’s life, the math is straightforward. We calculate the year-of-death RMD for each IRA, and the beneficiary (or beneficiaries) of each specific IRA must take the year-of-death RMD applicable to that account, from that account.

But what if an IRA owner of multiple IRAs with different beneficiaries took a lifetime distribution from one of his IRAs, thereby partially satisfying his own final aggregated RMD before death? We must now look to his total aggregated final year-of-death RMD and apply the shortfall to each of his IRAs. The shortfall is spread across all IRAs proportionally based on the total prior year-end balance of each account.

Example 3: Malcolm died in December of 2024 at the age of 75. At the time of Malcolm’s death, he owned two separate traditional IRAs. The prior-year-end balances of IRA #1 and IRA #2 (as of December 31, 2023) were $100,000 and $50,000, respectively. Based on the $150,000 total balance, Malcolm’s 2024 aggregated RMD was $6,098 ($150,000/24.6). Before his death, Malcolm had taken a $3,000 distribution from the smaller IRA #2 in 2024, and nothing from IRA #1. The remaining portion of his aggregated 2024 year-of-death RMD was $3,098.

Malcolm named his son John as beneficiary of the $100,000 IRA #1 and his daughter Susan as beneficiary of the $50,000 IRA #2. Based on the total prorated prior-year-end balances, beneficiary John and the larger IRA is responsible for 2/3 of the remaining year-of-death RMD ($2,065). This distribution must come from IRA #1. Beneficiary Susan is responsible for 1/3 of the remaining year-of-death RMD ($1,033). This distribution must come from IRA #2.

As mentioned, this end result is a bit clunky, for a couple of reasons. Technically, by taking the $3,000 from the smaller IRA #2 while he was still alive, Malcolm satisfied the RMD for that specific account ($50,000/24.6 = $2,033). However, since Malcolm had not yet satisfied his total aggregated 2024 RMD, the shortfall is prorated over each of his IRAs.

Communication is key to satisfying the prorated year-of-death distribution rule. What if the beneficiaries don’t know each other? What if beneficiaries and financial advisors are unaware of IRA accounts held with other custodians? This could result in certain beneficiaries taking more of the prorated year-of-death RMD than is required, and/or a shortfall in another account. But such a result may be unavoidable. Time will tell how this year-of-death RMD aggregation wrinkle plays out.

https://irahelp.com/slottreport/new-rules-aggregating-year-of-death-rmds/

Ian Berger, JD
IRA Analyst

If you have multiple traditional IRAs and want to do a 60-day rollover (or Roth conversion) in a year when a required minimum distribution (RMD) is due, the IRS has a surprise for you.

RMDs from multiple traditional IRAs (and SEP or SIMPLE IRAs) can be aggregated and paid from any one or more of those IRAs.

But what if you have multiple IRAs and want to do a rollover (or conversion) of one or more of your IRAs during a year when a RMD is due? The first dollars distributed out of an IRA (or plan) during an RMD year are considered to be RMDs. In addition, RMDs cannot be rolled over. But how do these rules apply if the amount you take out from an IRA is more than the RMD due from that IRA for the year?

Before the IRS issued proposed RMD regulations in 2022, you could take out just the RMD due from that IRA and then roll over or convert the rest. In other words, it wasn’t necessary to withdraw the total RMDs due from all your IRAs that year before being able to do a rollover. You only needed to satisfy the RMD for that particular IRA.

But the 2022 proposed regulations established a new rule, and the IRS just confirmed the new rule in its final regulations. This new rule says that if you have multiple IRAs, all of the RMDs due from each of your IRAs in a calendar year must be satisfied before you can do a rollover (or Roth conversion) of any IRAs during that year. (By contrast, you don’t have to take RMDs first if you do a direct transfer from one traditional IRA to another traditional IRA – instead of a 60-day rollover or a conversion.)

Example: Consuelo has three traditional IRAs: IRA #1, IRA #2 and IRA #3. She turns age 73 in 2024 and must start taking RMDs from those IRAs. Her 2024 RMD from IRA #1 is $4,000, her RMD from IRA #2 is $6,000, and her RMD from IRA #3 is $8,000. This gives her $18,000 of total 2024 RMDs. Before taking any RMDs this year, Consuelo withdraws $5,000 from IRA #1 and wants to convert it to a Roth IRA. Since her total 2024 RMDs are $18,000, Consuelo can’t convert any of the $5,000 withdrawal. Instead, she must apply it to the total RMD, and it will just be a taxable distribution. But she has reduced her 2024 RMD shortfall to $13,000 ($18,000 – $5,000).

The next day, Consuelo withdrawals $25,000 from IRA #2 in another attempt to do a Roth conversion. The first $13,000 of that withdrawal must be applied to wipe out the RMD shortfall. But she can convert the remaining $12,000.

https://irahelp.com/slottreport/new-ira-aggregation-rule-when-doing-a-rollover-in-an-rmd-year/

By Andy Ives, CFP®, AIF®
IRA Analyst

QUESTION:

I have been getting emails from a few sites pitching their subscriptions. They claim that Roth IRAs will all be taxable in the future. They say there are things you can do to avoid these taxes, but to find out what they are you have to subscribe to their newsletter. Is this true, and if so, how can one avoid taxes for Roth IRAs?

ANSWER:

Spam emails like you are referring to are oftentimes nothing more than shady sales pitches preying on fear. Don’t believe their false hype, and certainly don’t hand over any of your hard-earned dollars to these organizations. There are no guarantees as to what might happen in the future. However, despite what anyone says, we don’t think Roth IRAs will be taxable, for a multitude of reasons. For one, Congress loves Roth IRAs, because they generate tax revenue immediately. Why else would they recently create Roth SEP accounts and Roth SIMPLE plans? More Roth options mean more tax revenue now. Also, it would be politically risky to tax Roth IRAs since it would be seen as Congress reneging on their promise of a tax-free retirement savings account. So, when we look beyond the noise, all indicators say tax-free Roth accounts are here to stay.

QUESTION:

I inherited an IRA from my sister in 2008, so I take required minimum distributions (RMDs) based on the old (pre-SECURE Act) rules. I anticipate my children inheriting the remainder of the inherited IRA in the future. Will they be subject to the new 10-year RMD rules?

Thank you,

Bettilou

ANSWER:

Bettilou,

When your children inherit your inherited IRA, they will be “successor beneficiaries.” As successor beneficiaries, you are correct that they will receive the 10-year payout rule. Since you are operating under the old rules and taking annual “stretch” RMDs, the successor beneficiary rules dictate that your children must also continue those payments. They will essentially “step into your shoes” and continue with the same RMD factor that you are using, minus 1 each year, for years 1 – 9. (They will not use their own life expectancies.) They will also have the added layer of the 10-year rule, so whatever remains in the account at the end of year 10 must be distributed.

https://irahelp.com/slottreport/roth-iras-and-successor-beneficiaries-todays-slott-report-mailbag/

Sarah Brenner, JD
Director of Retirement Education

In 2020, the SECURE Act completely changed the game for nonspouse IRA beneficiaries. Now, most are subject to the 10-year payout rule. Recently released final RMD rules keep the controversial proposed rule that requires many beneficiaries subject to the 10-year rule to also take annual required minimum distributions (RMDs) during the 10-year period.

Here is some good news if you are inheriting a Roth IRA. This confusing and burdensome requirement of annual RMDs during the 10-year period will not apply to you.

Here’s why. The requirement to take annual RMDs during the 10-year period only applies when the IRA owner died on or after his required beginning date (RBD). The RBD is date by which RMDs must begin. For IRA owners, this would be April 1 of the year following the year the individual reaches age 73. Roth owners, however, are not subject to lifetime RMDs. Therefore, they have no RBD. So, every Roth IRA owner is deemed to have died before their RBD, regardless of their age at death. For example, a Roth IRA owner who dies at age 100 is still deemed to have died before her RBD.

Under the new final RMD rules, beneficiaries of traditional IRAs who are subject to the 10-year rule must take annual RMDs in years 1-9 of the 10-year period when death occurs on or after the RBD. But this is not the case for a Roth IRA beneficiary, since all Roth IRA owners are considered to have died before their RBD.

This can allow the inherited Roth funds to continue to accumulate income tax free for the full 10-year term. This is a huge advantage for Roth IRA beneficiaries. The full balance of the inherited Roth must still be withdrawn by the end of the 10^th year after death, but nothing has to be taken any earlier. The entire balance can then be withdrawn as a completely tax-free distribution.

Example 6: Miguel, age 80, dies in 2024. The beneficiary of his Roth IRA is his daughter, Madi, age 50. Madi will be subject to the 10-year rule, so the entire inherited Roth IRA must be distributed by December 31, 2034. However, she does not have to take annual RMDs during the 10 years.

https://irahelp.com/slottreport/the-roth-ira-advantage-under-the-final-rmd-rules/

By Andy Ives, CFP®, AIF®
IRA Analyst

When a person reaches the required beginning date (RBD) – generally April 1 of the year after the year the person turns age 73 – required minimum distributions (RMDs) must officially start on traditional IRAs. But what if an IRA owner dies in a year when the RMD is due, but before the full RMD has been paid out?

Ultimately, it is the responsibility of the beneficiary to take whatever remains of the unpaid year-of-death RMD. If there is more than one beneficiary, the 2024 final regulations, released on July 18,2024, confirm what we have long understood the rule to be: When an IRA has multiple beneficiaries, and if there is a shortfall of the year-of-death RMD, then any of the beneficiaries can take what remains of this final distribution. The year-of-death RMD is not paid to the estate unless the estate was the named beneficiary. From the summary of the final regulations:

“If an employee who is required to take a distribution in a calendar year dies before taking that distribution and has named more than one designated beneficiary, then any of those beneficiaries can satisfy the employee’s requirement to take a distribution in that calendar year (as opposed to each of the beneficiaries being required to take a proportional share of the unpaid amount).”

This rule can be helpful in many situations. For example, if a charity is named as a partial beneficiary, cashing out the charity’s percentage could cover what remains of the year-of-death RMD. The same holds true if, for example, one of the beneficiaries needs cash now. That lone beneficiary’s payout could potentially satisfy the balance of the year-of-death RMD, allowing the other beneficiaries to avoid an immediate distribution.

Historically, the deadline for taking the year-of-death RMD was December 31 of the year OF death. When death occurred late in the year, this tight deadline was often missed, adding unnecessary stress on beneficiaries. Missing a year-of-death RMD could result in the same penalty as missing any other RMD – 25% of whatever amount was not taken (reduced to 10% if the missed RMD is timely corrected).

In the IRS’s final regulations, the deadline to take the year-of-death RMD (and thereby avoid any penalty) is officially extended: “The final regulations extend the deadline for the beneficiary to take the missed required minimum distribution and be eligible for the automatic waiver. The new deadline is the later of the tax filing deadline for the taxable year of the beneficiary that begins with or within the calendar year in which the individual died and the end of the following calendar year.”

For most beneficiaries, this means the year-of-death deadline in now December 31 of the year AFTER the year of death.

Example: Grampa Joe, age 80, has a traditional IRA with his granddaughter Grace, age 22, as beneficiary. Grampa Joe’s annual RMD is normally paid on December 15. However, he dies on December 10, 2024. Granddaughter Grace is responsible for taking the 2024 year-of-death RMD, but in her grief and confusion, she fails to take it. Grace is eligible for an automatic waiver of the 25% missed RMD penalty if she takes the 2024 year-of-death RMD by December 31, 2025.

https://irahelp.com/slottreport/year-of-death-rmd-deadline-extended/