Market Review and Outlook

By Ian Berger, JD
IRA Analyst

Question:

Hi,

In a recent blog post, you addressed the complicated rules for a 401(k) to Roth IRA rollover. I have a similar question as it relates to a pre-tax IRA conversion to a Roth IRA.

My client is a 95 year-old woman who has a large pre-tax IRA. She has converted some of the pre-tax IRA to a Roth IRA. This is her first Roth IRA ever.

Suppose she dies three years later, prior to the 5-year holding period being met. The Roth IRA passes to her beneficiaries, who fall under the 10-year payout rule. But what is taxable and what is not?

Thank you in advance,

Bob

Answer:

Hi Bob,

The converted amounts themselves will be tax-free whenever paid out to the beneficiaries. Earnings on the converted amounts will be tax-free only if taken after the 5-year holding period has been satisfied. That period began on January 1 of the year of the first Roth conversion and is carried forward to the beneficiaries. It does not restart for the beneficiaries. So, for example, if your client did her first Roth conversion anytime in 2024, her 5-year period began on January 1, 2024, and even if she dies in 2027, it will end on December 31, 2028. After 2028, the entire inherited Roth IRA will be available tax-free.

Question:

I have three SEP IRAs with three different custodians. I still contribute to one of the SEPs on an annual basis. I am over age 70½. Can I take a qualified charitable distribution (QCD) out of one of the SEP IRAs I am not contributing to?

Answer:

Yes. A QCD can be made from any “inactive” SEP or SIMPLE IRA. A SEP or SIMPLE IRA is considered inactive for a year if an employer contribution isn’t made to it for that year.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/inherited-roth-iras-and-qualified-charitable-distributions-from-sep-iras-todays-slott-report-mailbag/

By Ian Berger, JD
IRA Analyst

Everyone knows that April 15, 2025, is the deadline for filing 2024 income tax returns. But April 15 is also a crucial deadline if you made too many 401(k) deferrals in 2024. If you don’t fix the error by that date, the tax consequences are serious. Having a tax filing extension for 2024 does NOT give you more time.

The maximum amount of pre-tax and Roth contributions you could make for 2024 was $23,000 (plus another $7,500 more if you were least age 50). Many people are unaware that contributions you make to ALL plans during the year are usually combined when applying that limit. (That aggregation rule doesn’t apply if one of your plans is a 457(b) plan.)

If you were in only one plan during 2024, your plan should have had internal controls to block you from exceeding the deferral limit. If the plan mistakenly allowed you to overcontribute, it’s up to the plan to fix the problem.

But that’s not the case if you were in two different plans during the year (because you had two jobs at the same time or changed jobs). That makes sense because one plan could not be expected to know how much you contributed to the other plan. So, the burden is on you to keep track. Your Form W-2 from each employer indicates the amount of pre-tax and Roth contributions in Box 12. Or, you can check your plan account statements.

If you’ve overcontributed, you must contact the administrator of one of the plans immediately and make them aware of the problem. To avoid double taxation (see below), the error must be corrected by April 15, 2025.

The plan you contact should fix the error by making  a “corrective distribution” to you. A corrective distribution is the excess over the $23,000/$30,500 limit, adjusted for earnings or losses attributable to the excess. You’ll receive a corrected W-2 that adds back the excess deferrals to your 2024 taxable income. (If you’ve already filed your 2024 tax return, you’ll need to amend it.) Earnings on the excess are taxable to you in 2025.

Example: Liang, age 48, made $18,000 of 2024 pre-tax contributions to Company A’s 401(k) plan before leaving to work for Company B. Liang didn’t keep track of his total 2024 contributions and made another $12,500 of pre-tax contributions to Company B’s 401(k) – for a total 2024 contribution of $30,500. He exceeded the 2024 deferral limit by $7,500 ($30,500 – $23,000). The excess deferrals earned $700. Liang became aware of this problem in early 2025 and contacted Company B. On March 31, 2025, Company B’s 401(k) makes a corrective distribution of $8,200 ($7,500 + $700) to him. Company B also sends Liang a corrected 2024 W-2 showing an additional $7,500 of 2024 taxable income. He must include the $700 of earnings as taxable income for 2025.

Why is it so important to have this fixed by April 15? Because if the error isn’t corrected by that date, you’ll be hit with double taxation. The excess deferrals won’t be paid to you, but they’ll still count as 2024 taxable income. And the excess, along with related earnings, will be taxable to you a second time in the year they are eventually distributed to you.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/avoid-double-trouble-by-fixing-2024-excess-401k-deferrals-by-april-15/

By Sarah Brenner, JD
Director of Retirement Education

Do you have a Roth IRA? If you do, there will very likely come a time when you want to take a distribution from that account. The distribution rules for taxation of Roth IRA distributions can be complicated, but if they are followed, the reward is tax-free withdrawals in retirement.

Here is what you need to know:

Aggregation

Things can get a little confusing if you have more than one Roth IRA. When determining the taxation of a Roth IRA distribution, all of your Roth IRAs are aggregated. What does “aggregated” mean? Well, simply put, this means your Roth IRAs are considered one account for tax purposes. Your IRA custodian reports the distribution on Form 1099-R to you and to the IRS. You will be responsible for determining the taxation of your distribution. You will use Form 8606 to report the Roth IRA distribution on your federal tax return.

Tax-Year Contributions

Amounts up to the total of your Roth IRA contributions are considered to be distributed first. These amounts are not taxable or subject to the early distribution penalty, even if you take them out before five years or before age 59½. In other words, you always have access to amounts equal to your contributions tax and penalty-free. Maybe, for example, you contributed to your Roth IRA in 2018, and you are now 32 years old and need that money. You will not be taxed or subject to penalty when the amount of that contribution is distributed. It doesn’t matter that you are not yet age 59½ and it doesn’t matter how you use your money.

Converted Amounts

Amounts up to the total of your Roth conversions are considered to be distributed next on a first-in, first-out basis. If you converted both pre- and after-tax amounts, the amount of your pre-tax amounts is distributed first. Distributions of amounts equal to your conversions are not taxable. Remember, you already paid taxes on those funds when you did the conversion. Pre-tax amounts are subject to the 10% early distribution penalty if you are under age 59½ at the time of the distribution and the conversion was less than five years ago. There are exceptions to the penalty such as disability or death. If you are over age 59½, you can immediately access the amount of your converted funds without worrying about the penalty. There is no five-year waiting period for you.

Earnings

The remaining portion of your Roth IRAs are considered earnings and are the last thing distributed from your account. Those amounts are tax-free and penalty-free if the distribution is a qualified distribution. A qualified distribution is made after you have had any Roth IRA account for five years AND you are over the age of 59½, you are disabled, you are taking the funds for a first-time home purchase, or the distribution is to your beneficiary after your death. If your distribution of amounts equal to earnings is not a qualified distribution, it will be taxable and subject to the 10% early distribution penalty, unless an exception applies.

Tax-Free Distributions in Retirement

You are not required to take any distributions from your Roth IRA during your lifetime. Unlike traditional IRAs, Roth IRAs are not subject to the lifetime required minimum distribution rules. However, if you do decide to withdraw funds, a qualified distribution will be completely tax-free and not included in adjusted gross income. By taking a qualified Roth IRA distribution, you can therefore avoid the stealth taxes that hit many retirees hard, such as taxation of Social Security benefits or Medicare surcharges when income rises in retirement.

https://irahelp.com/slottreport/how-roth-ira-distributions-are-taxed/

By Andy Ives, CFP®, AIF®
IRA Analyst

Question:

Hello,

If a person is turning 73 years old in March, s/he would be required to take required minimum distributions for the year. Can a person do Roth Conversion prior to turning age 73 (say in February)?  Does the first money out rule still apply?

Regards,

Ravi

Answer:

If you reach age 73 in 2025, then you have a required minimum distribution (RMD) for 2025, and the first money out of your IRA this year will be considered your RMD. If you convert prior to your 73^rd birthday in March, you will still need to take your 2025 RMD prior to the conversion.

Question:

Is it possible to reverse part of the Roth conversion that I did from my traditional IRA?

Thanks

Answer:

No, it is not possible to undo a conversion. In the past, an unwanted conversion from a traditional IRA to a Roth could be recharacterized back to a traditional IRA. However, the Tax Cuts and Jobs Act eliminated recharacterization of Roth IRA conversions back in 2018.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/roth-conversions-todays-slott-report-mailbag/

By Andy Ives, CFP®, AIF®
IRA Analyst

I appreciate it when reputable financial advisors fight for their clients. It is a pleasure to see a well-educated, experienced professional leave no stone unturned when it comes to helping someone through a problematic situation. Such conversations can be inspiring. “What if we try this? What if we tried that?” If a creative path to a desired outcome exists within the rules, I will diligently help the advisor map out a route while simultaneously pointing out the tripping hazards. In my February 24, 2025, Slott Report entry, I wrote about IRA detours and alternate routes. Today, we run into road closures.

Sometimes, there is no path forward. On occasion, all roads lead to dead ends. Recently, I traded emails with a respected advisor. Previous communications demonstrated this individual to be someone who understands some of the more complex IRA rules and strategies. In this situation, he was searching for any possible angle to help his client with an $8 million 401(k) avoid taking required minimum distributions (RMDs).

Our first email exchange centered on the still-working exception. For those who have a 401(k) or other employee retirement plan, the required beginning date (RBD) for RMDs is the same April 1 as for IRA owners, unless they are still working for the company where they have the plan. If the person does NOT own more than 5% of the company (and the plan allows), he can delay his RBD to April 1 of the year following the year he retires. The client in question was still working, but he was a more-than-5% owner. Therefore, he could not use the still-working exception on his current plan. Dead end.

The next stone the advisor flipped was an idea to transfer the 401(k) into another retirement plan that accepted rollovers. The client was not a 5% owner of the company sponsoring the other plan. Success! The client could delay RMDs on any dollars he moved into this plan! Not so fast. The client explicitly wanted to do Roth conversions over the next few years. The other plan did not allow in-plan Roth conversions. Also, the client wanted his entire $8 million in the hands of a specific money manager only available within the current 401(k). Dead end. (Yes, he could do partial rollovers back to the 401(k) or to an IRA for conversion, but that was not what the client wanted.)

Now things began to get interesting. Our conversation turned back to the still-working exception and the “more that 5% ownership test.” The still-working exception does not apply to an individual who owns more than 5% of the company in the year the individual turns age 73. This is a one-time determination. If the individual is a more-than-5% owner in that year, he will never be able to use the still-working exception on that plan. Such is the case even if he no longer owns more than 5% of the company at some point in the future. (Family aggregation rules apply in determining the percentage.)

The advisor considered terminating the 401(k) in the year the client turned age 73 and then opening a new plan in the future. No deal. The same business entity still existed, and it was already determined that the client was a more-than-5% owner. Dead end.

Next, the advisor shared an article he found which suggested the possibility of closing the actual business and then establishing an entirely new business entity to skirt the age 73 ownership test year. Within that article, the author used phrases like “would appear to work” but “the IRS has never formally blessed this planning technique.” Red flags. Best not to pursue this angle. Dead end.

Ultimately, when I get an uneasy feeling in my gut, I know it’s the end of the road. I told the advisor that I could not bless these latest strategies. I told him I respected his efforts on behalf of his client. I asked if he also felt that knot in his belly. (Based on his stellar record, I knew he did.) Yes, we hit a dead end, but at least we exhausted all possibilities. His client can rest easy knowing this advisor did everything in his power to find a legal workaround. But based on client needs, there were none. RMDs apply.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/rmd-avoidance-red-flags-and-dead-ends/

By Ian Berger, JD
IRA Analyst

More and more 401(k) plans are making Roth employee contributions available, and employees leaving their jobs often want to roll over Roth 401(k) funds to a Roth IRA. What tax rules apply to distributions of amounts rolled over? Warning: The rules are complicated because they involve two five-year holding periods, one for the Roth 401(k) distribution and the other for the Roth IRA distribution.

If Your Roth 401(k) Distribution Is Qualified

Step one is to figure out if your Roth 401(k) distribution is qualified; that is, if you are age 59½ or older (or disabled) and have satisfied a five-year holding period. The holding period begins on January 1 of the year you made your first Roth contribution to the current plan (or did a rollover of Roth funds into the plan or an in-plan Roth conversion). Roth contributions made to other plans (or IRAs) don’t count.

If your Roth 401(k) distribution is qualified, you can immediately withdraw tax-free the entire rolled-over amount (both the Roth 401(k) contributions themselves and associated earnings) from your Roth IRA. What about earnings generated after the rollover? You can’t withdraw those earnings tax-free until the five-year holding period for your Roth IRA has been satisfied. The Roth IRA clock begins on January 1 of the year you made your first contribution (or conversion) to any Roth IRA. (That’s why it’s so important to make a Roth IRA contribution – no matter how small – as early as possible to get the clock ticking.) Importantly, you cannot carry over the Roth 401(k) holding period and use itto satisfy the Roth IRA holding period. But if your Roth IRA is distributed after the Roth IRA holding period has been met, then you’re all set: Everything comes out tax-free and penalty-free.

If the Roth IRA holding period hasn’t been met (because, for example, the rollover is your first Roth IRA), then you have to wait out five years before withdrawing your post-rollover earnings free of taxes. But, again, the original amount rolled over can always be withdrawn without tax or penalty.

If Your Roth 401(k) Distribution Is Not Qualified

What if your Roth 401(k) distribution is not qualified? In that case, you can immediately withdraw tax-free only the rolled-over Roth 401(k) contributions from your Roth IRA. Both the rolled-over Roth 401(k) earnings and any post-rollover earnings come out tax-free only if the Roth IRA distribution is qualified; that is, you’re age 59½ or older (or disabled or using the funds for first-time homebuyer expenses) and you’ve satisfied the Roth IRA five-year holding period (discussed above).

If the Roth IRA distribution is not qualified, then you’ll pay taxes (and possibly the 10% early distribution penalty) on both the rolled-over earnings and post-rollover earnings out of the Roth IRA. But the rolled-over Roth 401(k) contributions can always be distributed free of taxes and penalty.

I said it was complicated! Consulting with a knowledgeable financial advisor prior to any rollover is highly recommended.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/deciphering-the-rules-for-roth-401k-to-roth-ira-rollovers/

By Andy Ives, CFP®, AIF®
IRA Analyst

QUESTION:

I opened my first Roth IRA in 2017 and a second Roth IRA in December 2021. My current age is 71. I withdrew some funds from these accounts last year. For tax year 2024, I received a 2024 Form 1099-R for the 2017 Roth IRA account with a distribution code of Q and a 1099-R for the 2021 Roth IRA with a distribution code of T. That’s where the confusion is – different distribution codes. Having the 2021 Roth IRA for less than 5 years, and having received the Form 1099-R with a distribution code of T, I wanted to make sure I did not have to pay taxes on this distribution. Having the first Roth IRA for more than 5 years, is not the second Roth IRA also covered within that 5-year requirement period for withdrawals?

Thanks,

Ken

ANSWER:

Ken,

I didn’t need to read much beyond your first two sentences. You are over age 59½ and have had a Roth IRA (any Roth IRA) for over 5 years. End of story. Every distribution you take will be tax free. If you do any Roth conversions in the future, the converted dollars and earnings will be immediately available tax free. As far as Roth IRAs go, you never have to worry about taxes again for the rest of your life. Regarding the 1099-R codes, Code Q is used for a distribution from a Roth IRA when the custodian knows the Roth IRA owner meets the 5-year holding period and has reached age 59½. Such is the case with your 2017 Roth IRA. Code T is used for a distribution from a Roth IRA when the custodian knows you are over 59½, but is unsure if you have met the 5-year period. That is the case with your 2021 Roth IRA. All is in order. Based on the details you shared, nothing is taxable.

QUESTION:

I am 77 years old and take required minimum distributions (RMDs) from my IRA. Can I name my grandchildren who are seven and five years old as beneficiaries for my IRA accounts? If something happens to me, can they stretch RMDs over their life expectancies if they are still minors at the time of my death?

ANSWER:

You can name your grandchildren as your IRA beneficiaries. However, even though they are minors, they do not qualify as “eligible designated beneficiaries” (EDBs) for your IRA. Only EDBs are allowed to take stretch RMD payments over their full life expectancy, and only minor children of the IRA owner qualify for this EDB category. Since the grandchildren are not your children, they would be subject to the 10-year payout rule.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

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

By Sarah Brenner, JD
Director of Retirement Education

Why is it so important to know how the “once-per-year rollover rule” works? Well, that’s because trouble with the once-per year rule is the kind of trouble no one wants! If you violate this rule, you are looking at some serious tax consequences. Here is what you need to know about this rule that can cause big problems for those who do not know all its details and pitfalls.

One Rollover a Year for An IRA Owner

If an IRA owner for whatever reason elects not to do a direct transfer but instead chooses to move her money by 60-day rollover, there will usually be no escaping the once-per-year rollover rule. The rule says that an IRA owner cannot roll over an IRA distribution that is received within a 365-day period of a prior distribution that was rolled over.

Traditional and Roth IRAs are combined for purposes of the once-per-year rule. So, for example, a distribution and subsequent rollover between your Roth IRAs will prevent another rollover of a distribution from your traditional IRA received within one year of the Roth IRA distribution. The bottom line is that an IRA-to-IRA (or Roth IRA-to-Roth IRA) 60-day rollover may not be done if you received a prior distribution within the last year (365 days) that you also rolled over.

The once-per-year rollover rule does NOT apply to rollovers between plans and IRAs or Roth IRA conversions.

Fatal Error

A mistake with the once-per-year rollover rule can result in the loss of your retirement savings.  It is a fatal error with no remedy.

If you take a distribution with the intent of rolling over and discover that you are ineligible to roll over the funds due to the rule, that distribution will be taxable to you. You will no longer have an IRA and will likely have a tax bill instead. The distribution will also be subject to the 10% early distribution penalty if you are under age 59½. If you go ahead and deposit the funds anyway, you will have an excess IRA contribution complete with all the penalties and headaches that go with it.

What about the IRS? Well, the IRS will not be able to grant relief. This is because by law the IRS has no authority to waive this rule. The self-certification procedures allowing for relief when the 60-day deadline is missed do not apply to violations of the once-per-year rollover rule. A private letter ruling (PLR) request won’t work either.

Do Direct Transfers Between Your IRAs.

Why chance it? A good place to start is by avoiding 60-day day rollovers whenever possible. If there is no 60-day rollover, then there is no once-per year rollover rule to worry about. How then can you move your retirement funds? The best advice is to directly transfer the funds from one retirement account to another rather than taking a distribution payable to yourself and then rolling it over to another retirement account. You can do as many transfers between IRAs annually as you want. There are no limits for you to worry about here.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/watch-out-for-the-once-per-year-rollover-rule/

By Andy Ives, CFP®, AIF®
IRA Analyst

Sometimes we get stuck in traffic, or a highway is closed, and we are forced to find an alternate route. I’m not talking about driving across someone’s front yard or going the wrong way on a one-way street. Think side roads and legal detours. While a main road may be blocked, that might not be the only way to reach your destination. The same holds true with certain IRA transactions. Here are a handful of creative “detours” that retirement account owners may be forced to take in order to reach their intended goal.

Backdoor Roth IRA. This is the classic workaround for anyone who makes too much money to contribute to a Roth IRA. Yes, there are contribution income limits which prohibit high earners from contributing directly to a Roth IRA. But these limitations can easily be overcome. High earners can make non-deductible contributions to a traditional IRA and then convert those dollars to a Roth IRA immediately thereafter. (There is no mandatory holding period before the conversion can be done.) Just be aware that the pro-rata rule will apply.

No Liquidity/RMD Aggregation. If an IRA owner holds an illiquid investment in his IRA, that is no excuse to avoid taking the required minimum distribution (RMD). The easiest “alternate route” is to take a distribution from another IRA. Assuming the IRA owner has another IRA, SEP or SIMPLE IRA that contains liquid assets, aggregation rules allow the RMD from the illiquid account to be taken from another IRA. Recognize that not all retirement accounts can be aggregated for RMD purposes. For example, an RMD for a 401(k) cannot be satisfied by taking a distribution from an IRA.

No Liquidity/RMD Conversion. Recently an advisor called and said his client was short by $24 with his IRA RMD. An illiquid investment prevented him from generating the cash to cover the shortfall. Additionally, he had no other IRA from which he could take the shortage from. The first idea was to make a contribution to the IRA, and then turn around and withdraw $24. But the retired IRA owner had no earned income, so a contribution was not allowed. The advisor mentioned that the client wanted to convert the entire IRA to his existing Roth. Ah-ha! A legal detour. Solution: The advisor converted the entire illiquid investment to a Roth. This resulted in a conversion of the remaining RMD of $24. But RMDs are not supposed to be converted. Oops. The $24 was now an excess contribution in the Roth. The existing Roth IRA had plenty of liquid investments. The $24 was then promptly removed from the Roth IRA as an excess contribution withdrawal. RMD satisfied, no penalties, legal workaround.

Estimated Taxes Underpayment. If it is late in the year and you find yourself behind in your estimated tax payments, take a distribution from your IRA and have 100% withheld. Taxes withheld are deemed to be paid in equally over all four quarters.

Taxes Withheld on Plan-to-IRA Rollover. Speaking of having taxes withheld, sometimes plan participants erroneously request a distribution (as opposed to a direct rollover) from their work plan with the intent of rolling over the dollars within 60 days. When the plan processes the distribution, there is a requirement to withhold 20%. In a situation like this, the account owner can make up the “missing” 20% with dollars from his own savings to complete a full 100% rollover. The 20% withheld will be a credit to the IRS that the taxpayer may be able to recoup at tax time.

Just because the sign says “Dead End” or “Road Closed” does not mean the journey is necessarily over. Legal workarounds exist for many retirement account transactions.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/ira-transactions-detours-and-alternate-routes/

By Ian Berger, JD
IRA Analyst

Question:

Dear Ed Slott and America’s IRA Experts,

I have a rollover traditional IRA that was set up when I left my last job. I am no longer employed, so I don’t have any earned income. My husband works full time, and our filing status is married filing jointly.

I would like to know if I am able to contribute to a newly established traditional IRA account with no balance and then convert it to a Roth IRA. Also, when I convert the new traditional IRA to a Roth IRA, do I have to consider the assets in the rollover traditional IRA and calculate the taxes on a pro-rata basis? Or do I calculate taxes owed on the converted Roth dollars using only the contribution from the new traditional IRA? Lastly, is this conversion strategy limited by income levels?

Sincerely,

Anna

Answer:

Hi Anna,

As a spouse, you are allowed to use your husband’s compensation to open up a traditional IRA for yourself. (This assumes his compensation is high enough to cover your IRA and any IRA he opens for himself.) When you convert your traditional IRA to a Roth IRA, the pro-rata rule does require you to take into account your rollover IRA (and any other IRAs or SEP or SIMPLE IRAs you may have) to determine the taxation of the conversion. The good news is that there are no income limits on converting to a Roth IRA.

Question:

Can a person do 60-day rollovers from both their traditional and Roth IRAs in the same 365-day period?

Answer:

Traditional and Roth IRAs are combined for purposes of the once-per-year rollover rule. So, a distribution and subsequent rollover between your Roth IRAs will prevent another rollover of a distribution and rollover between your traditional IRAs if the distribution of the traditional IRA occurs within 365 days of the distribution of the Roth IRA. The same would be true if the traditional IRA distribution and rollover comes first.

By Ian Berger, JD
IRA Analyst

One important provision of the 2022 SECURE 2.0 law is the requirement that most new 401(k) and 403(b) plans must institute automatic enrollment. This rule is effective for plan years beginning after December 31, 2024. A “plan year” is the plan’s 12-month fiscal year and is usually January 1 – December 31. So, many new plans became subject to automatic enrollment on January 1, 2025. On January 9, 2025, the IRS issued proposed regulations on this rule.

What is automatic enrollment? It’s a plan feature that requires covered employees to make elective deferrals to the plan unless they opt out. Automatic enrollment is not new. Over the last 15 years, many plans have voluntarily adopted this plan design as a way of boosting plan participation. But now it will be mandatory for most newly-established plans. A number of studies have shown that automatic enrollment is indeed an effective way of getting employees to start making 401(k) deferrals. However, some critics have argued that automatic enrollment effectively dupes many employees into contributing when they can’t afford it and that employees don’t understand that they can opt out.

The IRS proposed regulations say that several categories of plans are exempt from mandatory automatic enrollment (although employers of these plans are free to voluntarily adopt it):

• Grandfathered plans: When SECURE 2.0 was enacted, some news outlets reported that the new automatic enrollment rule applied to existing plans. That’s clearly not what the law says, and the IRS confirms this in the regulations. Any 401(k) or 403(b) plan adopted by the employer before December 29, 2022 (the effective date of SECURE 2.0) is grandfathered. That’s the case even if the plan did not start operating until after that date.

• Governmental and church plans: The IRS confirms that plans sponsored by governments or churches are exempt.
• Small employer plans: Companies that “normally” employ 10 or fewer employees do not have to comply. The regulations set out a complicated method for determining whether a small company meets that standard. In essence, a company is not exempt if it employs more than 10 employees during 50% of the company’s fiscal year. There are special rules for counting part-time employees.
• Plans of new businesses: Any business that, as of the beginning of the plan’s “plan year” has been in existence for less than three years is exempt.

Employers with plans subject to mandatory automatic enrollment can set the deferral rate for employees who don’t opt out or who elect a deferral rate higher than the one set by the employer. That rate must be at least 3% of pay and no more than 10% of pay. Each year after that, the employer must increase the required deferral rate by 1% until it reaches a rate of at least 10% and no more than 15% of pay. Any employee subject to automatic enrollment must be allowed to withdraw his deferrals within 90 days of the date of the first automatic contribution to the plan.

The proposed regulations aren’t technically effective until after the IRS issues final regulations. In the interim, plans should be able to rely on the proposed regulations.

https://irahelp.com/slottreport/irs-issues-proposed-regulations-on-automatic-enrollment-requirement/

By Sarah Brenner, JD
Director of Retirement Education

Tax season is upon us! This is the time of year when many people consider making a contribution to an IRA. If you are thinking about doing so, here are 10 things you need to know.

1. You can still make an IRA contribution for 2024. This is called a prior year contribution. If you do, be sure you let your IRA custodian know so they can code it properly. If you don’t, they may code it for the current year instead and that will cause tax problems for you.
2. The deadline for making a 2024 IRA is April 15, 2025. Having an extension of time to file your return does NOT give you more time to make a 2024 IRA contribution.
3. The maximum dollar amount that is allowed to be contributed by an individual to a traditional or Roth IRA for both 2024 and 2025 is $7,000 for those under age 50 and $8,000 for those age 50 and older.
4. You cannot contribute $7,000 (or $8,000) to both a traditional IRA and a Roth IRA for 2024 or 2025. You are limited to $7,000 (or $8,000) combined to both types of IRAs. For example, you could contribute $2,000 to a traditional IRA and $5,000 to a Roth IRA for 2024 but you cannot contribute $7,000 to both your traditional IRA and your Roth IRA.
5. IRA contributions must be based on taxable compensation. Taxable income for IRA purposes can include a salary from a job or earnings from self-employment. It does not include investment income, Social Security, or pension income.
6. If you do not work but your spouse does, you can make an IRA contribution based on your spouse’s taxable compensation. A contribution to your IRA based on your spouse’s compensation cannot exceed the amount of the spouse’s compensation, adjusted by any IRA contribution the spouse makes for himself.
7. Roth IRA contributions are subject to income limits, but there are no income limits for traditional IRA contributions.
8. Many individuals can deduct their traditional IRA contributions. However, for active participants in employer plans and their spouses, the ability to deduct an IRA contribution will phase out for those with higher incomes.
9. There are no age restrictions on making contributions to either traditional or Roth IRAs.
10. IRA custodians will report your IRA contributions to the IRS (and to you). This is done on Form 5498.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/thinking-about-making-an-ira-contribution-here-are-10-things-you-need-to-know/

By Sarah Brenner, JD
Director of Retirement Education

Question:

I just inherited an IRA from my sister. She died at age 74 and I am age 78. Am I required to use the 10-year rule, or can I stretch distributions from the inherited account over my life expectancy? I am hearing conflicting information as to what my options are.

Answer:

You are considered an eligible designated beneficiary (EDB) under the SECURE Act because you are older than your sister. EDBs include any beneficiary who is “not more than 10 years younger than the IRA owner.” Being older qualifies. Because you are an EDB, you are not subject to the 10-year rule. Instead, you have the ability to stretch distributions from the inherited account over your single life expectancy.

Question:

I just started participating in a SIMPLE IRA plan at my job. I would like to convert my SIMPLE IRA funds to a Roth IRA. Can I do this?

Answer: There is a two-year waiting period before SIMPLE IRA funds can be converted to a Roth IRA. This waiting period begins with the first contribution to the SIMPLE IRA.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/inherited-iras-and-roth-conversions-todays-slott-report-mailbag-2/

By Andy Ives, CFP®, AIF®
IRA Analyst

On January 21, Ichiro Suzuki was elected to Major League Baseball’s Hall of Fame by the Baseball Writers Association of America. It takes 75% of the writer’s support to gain entry, and Ichiro was chosen on 393 out of 394 ballots. Ichiro joined Derek Jeter (396/397) and Ken Griffey Jr. (337/440) as players to garner 99+% of the votes. (Yankees great Mariano Rivera was the only player elected unanimously, back in 2019.) While a person can reach Cooperstown without 100% of the votes, such is not the case with many IRA transactions. A single misstep, a lone “missed vote,” and the outcome could be completely different. Here are a handful of transactions where a 1% shortfall can cause the entire house of baseball cards to come tumblingdown.

Missing the 60-Day Rollover Window by 1 Day. IRA owners have 60 days to complete a rollover. There is no wiggle room. Try to do the rollover on Day 61 and it will be rejected.

One Rollover Per Year. Speaking of rollovers, IRA owners can only do one 60-day rollover in any 12-month period. You did a little $3,000 rollover 10 months ago, and now you take a $3 million distribution with the intent to roll that over as well? Sorry, the one-rollover-per-year rule dictates that the $3 million distribution is taxable and can’t go back to a traditional IRA.

Super Catch-Up Birthdate. There is a new “super catch-up” option for workplace plans like a 401(k) or SIMPLE IRA. Participants who turn ages 60, 61, 62 or 63 during the calendar year can contribute additional dollars to their plan. You turned age 64 on December 31? That means you are ineligible for the extra catch-up for that entire year.

Death on December 31, 2019. Continuing with last-day-of-the-year deadlines…this is somewhat morbid: If an IRA owner died on December 31, 2019, then all of his living beneficiaries would get the full lifetime stretch. If he hung on for a few more hours and passed away on January 1, then we must consider the 10-year rule. (Thank you, SECURE Act for compressing the payout window.) This could shave decades off the payout structure ofan inherited IRA.

Still-Working Exception. On the flip side, retiring on December 31 is a bad thing when it comes to the still-working exception and delaying required minimum distributions (RMDs)from employer plans. The RMD will be due for that same year if you retire on December 31. In the case of the still-working exception, it behooves a worker to hang on for one more day and retire on January 1.

Prohibited Transactions. Do you have an investment property in your self-directed IRA? Better keep an arm’s length. You can’t do anything to improve the property yourself. If you stop by and change a lightbulb, that’s a prohibited transaction, and the entire IRA is deemed distributed.

QCDs and Early Distributions. Want to do a qualified charitable distribution (QCD)? Very generous! Just don’t try to do it when you are age 70 and 180 days. You must be age 70½. Same deal with avoiding the 10% early IRA distribution penalty. You must be 59 AND a full six months.

Roth Conversions and IRMAA. You did a Roth conversion that pushed your modified adjusted gross income just $1 into an Income-Related Monthly Adjustment (IRMAA) bracket? These are cliff brackets. One dollar over and you just bought yourself a year of elevated Medicare surcharges.

Ichiro will soon have his bust in the Baseball Hall of Fame. Get sideways with the IRA rules, if only by a single day or dollar, and you’ll be busted.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/99-good-enough-for-the-hall-of-fame-but-not-for-certain-ira-transactions/

By Ian Berger, JD
IRA Analyst

Here’s one question that keeps coming up: If I retire in the year when I turn 73 (or older) and want to directly roll over my 401(k) funds to an IRA, do I have to first take a required minimum distribution (RMD) from my 401(k)?

Well, RMDs normally don’t need to start until April 1 following the year you turn age 73 (or April 1 following the year you retire if you’re using the “still-working exception”). That April 1 is considered your required beginning date (RBD) for RMDs. So, it would SEEM THAT you shouldn’t have to take an RMD from your 401(k) if you do a rollover BEFORE that date.

But, as with many retirement account tax issues, what seems like a correct assumption turns out not to be. Your ability to defer your first RMD into the next year is trumped by three tax rules. First, a direct rollover from a plan is considered a distribution and then a rollover. Second, the first funds distributed to you in a year for which an RMD is required are considered part of the RMD (the “first-dollars-out rule”). Third, RMDs can never be rolled over. Putting all these rules together means that the first dollars distributed to you as part of a direct rollover in the year you retire on or after age 73 are part of the RMD and aren’t eligible for rollover.

What if the 401(k) RMD is rolled over? Then, you have an excess IRA contribution. But that’s not as bad as it sounds. As long as the rolled-over amount, along with earnings or losses attributable to the excess amount (net income attributable, or “NIA”), are withdrawn from the IRA by October 15 of the year after the year of the rollover, you won’t have a penalty.

Example: Caitlin works for Fourth Fifth National Bank and participates in its 401(k) plan. Caitlin uses the still-working exception to delay plan RMDs beyond age 73. In 2025 at age 74, Caitlin retires and elects to roll over her entire 401(k) balance (worth $400,000 as of December 31, 2024) to an IRA. She knows that her 401(k) RBD is not until April 1, 2026. For that reason, she rolls over the entire 401(k) balance (including her 2025 401(k) RMD of $15,686) to the IRA. On February 1, 2026, Caitlin discovers that she now has a $15,686 excess IRA contribution. The IRA custodian tells her that the $15,686 excess has earned $1,000. She can fix the error without penalty by withdrawing $16,686 from her IRA by October 15, 2026. (The $1,000 in earnings will be taxable.)

Can Caitlin avoid taking the 2025 RMD from her 401(k) in 2025? Yes, by delaying her 401(k) distribution/rollover until 2026. But then she would have to take two RMDs – the 2025 RMD and the 2026 RMD – before rolling over the rest of her funds to her IRA.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/do-i-have-to-take-an-rmd-before-rolling-over-my-401k-distribution/

By Andy Ives, CFP^®, AIF^®
IRA Analyst

QUESTION:

Am I correct that a non-spouse Roth IRA beneficiary does NOT have a yearly required minimum distribution (RMD) over the 10-year period?

Ken

ANSWER:

Ken,

You are correct. Non-spouse beneficiaries of Roth IRAs that are subject to the 10-year rule do not have to take RMDs in years 1 – 9. The only requirement is that the inherited Roth IRA be emptied by the end of the tenth year. The reason for no RMDs within the 10-year period is that, since Roth IRA owners never have to take RMDs during their lifetime, all Roth IRA owners are deemed to die prior to the required beginning date (“RBD,” when RMDs are “turned on”). This is true no matter how old the Roth IRA owner is at death. As such, death before the RBD means no RMDs within the 10-year period.

QUESTION:

Can inherited IRAs be converted to Roth IRAs?

Michael

ANSWER:

Michael,

No, inherited IRAs cannot be converted to an inherited Roth IRA or to a person’s own Roth IRA. Inherited Roth IRAs must stay as inherited accounts. There is an anomaly in the rules for inherited 401(k) plans to be converted to inherited Roth IRAs, but again, that is only applicable to some inherited plan accounts.

https://irahelp.com/slottreport/non-spouse-beneficiaries-and-inherited-iras-todays-slott-report-mailbag/

By Sarah Brenner, JD
Director of Retirement Education

The deadline for most retirement account owners to take their 2025 required minimum distribution (RMD) is December 31, 2025. However, there are good reasons why you should take your RMD now instead of waiting.

You are doing a rollover. Maybe you are retiring this year, and you are now moving your employer plan funds to an IRA, or maybe you are tapping your IRA with the intent of doing a 60-day rollover after receiving the funds. In both of these situations, the first-money-out rule says that the first money that is distributed from your retirement account is your 2025 RMD. There is no choice in the matter. The rules also say that your RMD is not rollover eligible. You must take it prior to the rollover.

If you are in either of these situations, you must take your 2025 RMD now, before doing the rollover. You cannot wait to take your RMD later in the year.

You are doing a conversion. A Roth conversion can be a smart move. However, if you are age 73 or older this year and doing a conversion now, you will need to take your 2025 RMD from your IRA prior to the conversion. Why? The IRS says the first money out of your IRA is your RMD. A conversion is subject to the rollover rules, so your RMD cannot be converted.

Your IRAs are all seen as one IRA by the IRS. To make things even more complicated, the final RMD regulations confirm that when it comes to RMDs, your IRAs are aggregated. That means that if you have multiple IRAs (including SEP and SIMPLE IRAs), you must take your 2025 RMDs from all of them before doing any rollovers or conversions.

Avoid Last Minute Mistakes. Even if you aren’t required to take your 2025 RMD now, there are still good reasons why you should go ahead and do so. Waiting until late in the year is a recipe for trouble. The holiday season is busy and your RMD can get lost in the shuffle. Or, maybe you are charitably inclined and looking to satisfy your RMD by doing a qualified charitable distribution (QCD). This will require the custodian to send funds directly to charity and the charity must cash the check. These steps require some time and coordination. Taking care of these transactions now is a good move because you have plenty of time to check and be sure that everything is done properly.

Now Instead of Later

For many, taking an RMD is a year-end ritual. Maybe it’s time to change that mind set. The rules may require you to address your RMD sooner. Even if you can wait, it can be smart planning to take your 2025 RMD now instead of later.

https://irahelp.com/slottreport/why-you-should-take-your-2025-rmd-now/

By Andy Ives, CFP®, AIF®
IRA Analyst

Just over 10 years ago, in June 2014, the U.S. Supreme Court ruled unanimously, 9-0, that inherited IRAs are NOT protected in bankruptcy under federal law. The primary issue before the Court was whether an inherited IRA is a “retirement account.” Considering the fact that “inherited IRA” is short for “inherited individual retirement arrangement,” this would seem like an odd question to debate. The word “retirement” is right there in the name. Nevertheless, the Supreme Court felt that three primary characteristics of inherited IRAs were not features of a “retirement” account. Those three characteristics were:

Beneficiaries cannot add money to inherited IRAs like IRA owners can to their own accounts. This is true. If a person inherits an IRA from any other person, that beneficiary cannot make any contributions to the inherited IRA. The beneficiary cannot roll over any of their own IRA dollars into that inherited IRA, and they cannot do any Roth conversions with the inherited IRA. Of course, a spouse beneficiary has the option of doing a spousal rollover of the inherited account into her own IRA. The surviving spouse can then make contributions to the account, but this account is no longer considered “inherited.” After a spousal rollover, the account is deemed to have been owned by the surviving spouse since Day 1 and is hers to do with as she pleases.

Beneficiaries of inherited IRAs must generally begin to take required minimum distributions (RMDs) in the year after they inherit the account, regardless of how far away they are from retirement. Remember, this Supreme Court ruling came down in 2014, well before the SECURE Act. Back in the day, under the old rules, any living, breathing beneficiary could set up an inherited IRA and start taking annual RMDs in the year after the year of death. (Now we have the 10-year rule for certain beneficiaries, and annual RMDs do not always apply within the 10-year period.) These annual “stretch” RMDs are based on the beneficiary’s single life expectancy. Annual RMDs do not apply to the original IRA owner until he reaches RMD age (currently age 73). Since annual RMDs applied to beneficiaries at any age (again, under the old rules), then inherited IRAs are NOT retirement accounts.

Beneficiaries can take a total distribution of their inherited IRA at any time and use the funds for any purpose without a penalty. IRA owners under age 59½ cannot take lifetime, penalty-free distributions from their own IRA unless an exception to the 10% early withdrawal penalty applies. The 10% penalty does not apply to distributions from an inherited IRA. A beneficiary at any age can completely drain the inherited account without penalty (although taxes may apply). Therefore, inherited IRAs are NOT retirement accounts in the eyes of the Supreme Court.

A handful of states disagree. For example, Idaho does offer bankruptcy protection to inherited IRAs. But for most inherited IRA owners, it is important to recognize that the favorable bankruptcy protection afforded to such funds under the Federal Bankruptcy Code does NOT extend to them. Based on the Supreme Court’s reasoning on the three items above, this seems like a sensible conclusion.

https://irahelp.com/slottreport/inherited-iras-bankruptcy-protection/

By Ian Berger, JD
IRA Analyst

Question:

I have an IRA holding an immediate annuity as well as other IRAs. With the passage of the SECURE 2.0 Act, l understand that I may be able to apply my monthly annuity payments against my RMD requirement for all of my IRAs. The only valuation I can get on my annuity is the year-end fair market value. Can you provide any update to any IRS ruling on this?

Tom

Answer:

Hi Tom,

Your understanding of the SECURE 2.0 provision is correct. The IRS confirmed this in regulations issued last July. Since you have a year-end valuation of the annuity from the insurance company, you can take advantage of this rule. For 2025, first calculate the total RMD of all of your IRAs (using 12/31/24 values divided by your life expectancy under the IRS Uniform Lifetime Table). Then, you will only need to take RMDs from your non-annuity IRAs equal to that total RMD minus the sum of your monthly annuity payments.

Question:

In a previous answer to a question submitted to the Slott Report Mailbag, you said section 327 of the SECURE 2.0 Act applies to an IRA inherited by a spouse beneficiary. I thought that these new rules for spouse beneficiaries only apply to spouse beneficiaries of employer plans and not  IRAs. Is this true?

Answer:

No, the IRS has made clear that the section 327 rules apply to spouse beneficiaries of both employer plans and IRAs.

https://irahelp.com/slottreport/rmds-for-annuities-and-spousal-beneficiary-rules-todays-slott-report-mailbag/

By Ian Berger, JD
IRA Analyst

You probably know there’s a limit on the amount of pre-tax and Roth contributions you can make to your company savings plan each year. The 2025 elective deferral limit is $23,500 for 401(k), 403(b) and 457(b) plans and is either $16,500 or $17,600 for SIMPLE plans (depending on the size of your employer). If you’re age 50 or older, you can make additional catch-up contributions beyond these limits, and if you’re age 60, 61, 62 or 63, you may qualify for even higher catch-ups.

But what if you’re in two different plans at the same time or in two different plans during the same year after changing jobs? Do you get a separate elective deferral limit for your pre-tax and Roth contributions to each plan? The answer is generally no. The cap for pre-tax and Roth employee contributions is usually a “per-person” limit – not a “per-plan” limit. So, your contributions to all plans are normally aggregated when the limit is applied. It doesn’t matter if the plans are sponsored by companies that are totally unrelated under the tax rules.

Example 1: Samar, age 49, has a 401(k) through his regular job with Crypto Solutions and a solo 401(k) through a computer repair side gig. The most that Samar can defer between the two plans for 2025 is $23,500. It doesn’t matter that Crypto and his computer repair company are unrelated businesses.

Why do we say “generally,” “usually,” and “normally?” Well, like most tax rules, it’s just not that simple. There are two exceptions to the rule that requires aggregation of contributions to multiple plans. First, traditional (non-Roth) after-tax contributions, if allowed by the plan, don’t count towards the $23,500 elective deferral limit (although they do count towards the overall contribution limit, discussed in the next paragraph). Second, 457(b) plans have their own separate limit.

Besides the elective deferral limit, there’s another annual cap to worry about – the overall contribution limit (sometimes referred to as the “415 limit”). This limit is the maximum amount of ALL contributions that can be made to a plan in any year. Both your own contributions – pre-tax, Roth or after-tax (non-Roth) – and your employer’s contributions (matching or profit sharing) are counted. For 2025, the overall contribution limit is $70,000 (higher if catch-up contributions are made).

Generally, contributions made to two plans sponsored by businesses considered related under IRS rules are combined for the overall limit. But if you’re in two plans maintained by separate unrelated companies, contributions generally aren’t combined, and you get the benefit of a separate overall cap for each plan.

Example 2: Crypto Solutions and Samar’s computer business (from Example 1) are considered unrelated businesses. So, for 2025, Samar has a separate overall limit for each 401(k) plan and could theoretically have a total of $140,000 ($70,000 x 2) in combined contributions. However, to achieve that result, he would have to make a large amount of after-tax employee contributions and/or receive a large amount of employer contributions. In any case, Samar’s combined pre-tax and Roth contributions between the two plans would still be limited to $23,500.

https://irahelp.com/slottreport/what-are-my-contribution-limits-if-i-participate-in-two-company-savings-plans/

By Sarah Brenner, JD
Director of Retirement Education

Many of the provisions of the Tax Cuts and Jobs Act are scheduled to expire at the end of 2025. There are currently a number of proposals in the works in Congress to extend these tax cuts. A serious hurdle is how to pay for them. One interesting legislative proposal that has surfaced to cover the cost is the possibility of requiring Health Savings Accounts (HSAs) to be made on a Roth basis.

How HSAs Work

Under current law, an HSA is a tax-free account that is used to pay for qualified medical expenses that aren’t covered by insurance. It is similar to an IRA in that it’s a custodial or trust account set up with a financial institution that is owned and controlled by the individual, not by the employer.

In order to contribute to an HSA, an individual must be:

1. Covered by a high deductible health plan (HDHP),

2. Not enrolled in Medicare, and

3. Not eligible to be claimed as a dependent on someone else’s tax return

Everyone gets a full federal income tax deduction for the HSA contributions they make. There is no income limit or phase-out. It is an above-the-line deduction rather than an itemized deduction, so it’s available even if the standard deduction is taken on the tax return.

HSA withdrawals are tax-free when used to pay for qualified medical expenses of the account owner, his spouse, or dependents. Also, the HSA can be used to reimburse the account owner for qualified medical expenses he already paid for. Generally, qualified medical expenses are those that would be eligible for the medical expense tax deduction if someone was itemizing expenses on their tax return. They usually include all medical and dental expenses and prescription drugs (but not over-the counter medicines). IRS Publication 502, Medical and Dental Expenses, has comprehensive lists of what expenses are, and are not, qualified medical expenses.

If the HSA is not used for qualified medical expenses, then the distribution is not tax-free but instead is taxed as ordinary income and is also subject to a 20% penalty. If the individual is age 65 or older or has died or become disabled, then the 20% penalty won’t apply, but the distribution is still taxable if it wasn’t used for qualified expenses.

HSAs are an extremely tax-efficient way to pay for medical expenses. HSAs can be used to pay for current medical expenses on a tax-free basis – just like qualified Roth IRA distributions. Plus, regular HSA contributions made by a client are tax-deductible – just like most traditional IRA contributions.  It’s like getting the best of both worlds, at least when it comes to medical expenses.

Roth HSAs – A Bad Bargain for Savers

Any Roth account is funded with after-tax revenue. Requiring a contribution to an HSA to be made as a Roth contribution would be a win for Congress because they would generate immediate revenue. However, for taxpayers that would be a loss. While savers could still enjoy the benefit of tax-free distributions if HSAs become Roth accounts, they would lose the ability to deduct their contributions. That seems like a bad bargain for savers. At The Slott Report, we will be following this potentially detrimental legislative proposal closely as we watch Congress debate tax code changes.

Stay tuned!

https://irahelp.com/slottreport/are-hsas-going-roth/

By Sarah Brenner, JD
Director of Retirement Education

Question:

I have a large non-qualified 457 deferred compensation plan and I am required to take distributions. I am looking to minimize taxes. Can I roll over these funds to an IRA?

Answer:

Unfortunately, this will not work. A non-qualified deferred compensation plan is not eligible for rollover to an IRA.

Question:

Hello,

I had a question concerning inherited Roth IRAs. I know that in the past you have said that no required minimum distribution (RMD) is required for these accounts. Does this include inherited Roth IRAs that were created prior to the SECURE ACT changes? There is so much confusion on Roth IRA RMDs, so I wanted to be sure.

Thank you!

Kade

Answer:

Hi Kade,

This is an area of great confusion! Non-eligible designated Roth IRA beneficiaries (NEDBs) are not required to take annual RMDs during the 10-year period. However, there are other situations where annual RMDs are required for Roth beneficiaries. Roth IRA beneficiaries who inherited prior to 2020 (when the SECURE Act became effective) must still take these annual RMDs. Eligible designated beneficiaries (EDBs) who inherited after SECURE and are using the “stretch” must also take annual RMDs from an inherited Roth IRA.

https://irahelp.com/slottreport/rollovers-and-inherited-iras-todays-slott-report-mailbag-2/

By Andy Ives, CFP®, AIF®
IRA Analyst

When the “check engine” light comes on in a vehicle, most people are rightfully concerned that something is wrong. When a fire alarm blares through a building, it is wise to take stock of your surroundings. And when a member of Ed Slott’s Elite IRA Advisor Group^℠ calls and says a red alert popped up on his monitor as he attempted to do a 529-to-Roth rollover, we must assess the situation. In the end, it is our opinion that the warning notification on the advisor’s computer was incorrect. A false alarm. What was the computer worried about?

Yes, there are a number of restrictions when it comes to moving money from a 529 plan to a Roth IRA. For example:

• The Roth IRA must be in the name of the 529 beneficiary.
• The maximum amount that can be rolled over in a lifetime is $35,000.
• The 529 plan must have been open for more than 15 years.
• Rollovers are subject to the annual Roth IRA contribution limit.
• Etc., etc.

In this case, it appeared that all the proper boxes were checked, and the coast was clear for the advisor to proceed. He completed a successful 529-to-Roth transaction in December 2024, and was now trying to execute another 529-to-Roth rollover for the same client in January 2025. Yet the computer was flashing a red alert. The message said that, when processing a 529-to-Roth rollover, the one-rollover-per-year rule must be considered. It is our interpretation that this is UNTRUE (although definitive guidance is needed). The SECURE Act explicitly states that, to qualify as a 529-to-Roth rollover, the transaction must be “paid in a direct trustee-to-trustee transfer to a Roth IRA maintained for the benefit of such designated beneficiary.”

So, if the transaction must be completed as a direct trustee-to-trustee transfer, then the rollover rules are irrelevant. You cannot do a 529-to-Roth transaction as a 60-day rollover. As such, the one-rollover-per-year rule does not apply to 529-to-Roth IRA transfers. In hindsight, it’s easy to see where the confusion comes from. It’s all about terminology, and when a transaction is broadly referred to as a 529-to-Roth “rollover,” it is no surprise red flags go up.

Further proof (in our opinion) that the rollover rules do not apply to these transactions is that 529-to-Roth IRA transfers are considered Roth IRA contributions. The normal contribution limits apply. Any amount transferred from a 529 plan to a Roth IRA reduces the amount of a “regular” Roth IRA contribution the 529 beneficiary can make for that same year. Therefore, since these dollars are contributions, the rollover rules appear to be again rendered moot.

Alarms exist to keep people safe, and they should be heeded. However, sometimes a check engine light goes on for no ascertainable reason. Sometimes a jerk pulls a fire alarm as a bad joke, and sometimes computer software is incorrect. In this case, the advisor played his cards well. Assess the situation, contact the Ed Slott team, and proceed with confidence.

https://irahelp.com/slottreport/529-to-roth-ira-false-alarm/

By Sarah Brenner, JD
Director of Retirement Education

Today is Inauguration Day. A new administration has arrived. We also have a new Congress. With the arrival of newly elected officials, many will have hopes of legislative change. When it comes to retirement accounts, one rule that the new Congress should consider changing immediately is the income limit rule that applies to Roth IRA contributions. This pointless rule should be eliminated.

The Roth IRA Income Limits

The Roth IRA tax year contribution limit for 2024 and 2025 is $7,000. Those who are age 50 or older by the end of the year can contribute $8,000. However, not everyone is eligible to contribute to a Roth IRA. Congress has placed income restrictions on Roth contributions. Here are the limits on modified adjusted gross income for Roth tax year contributions:

Why Congress Should Do Away with Roth IRA Income Limits

There are several reasons why the new Congress should make the Roth IRA contribution income limits history.

The backdoor is wide open. The Roth IRA contribution limits are not stopping high income savers. There is an easy workaround. You can simply make a nondeductible traditional IRA contribution (no income limits apply) and then convert it to a Roth IRA (no income limits apply).

While there may have been concerns about this strategy years ago, there has been no evidence that either Congress or the IRS is doing anything to prevent these transactions. In fact, Congress indirectly “blessed” the backdoor Roth IRA conversion in the committee report to the Tax Cuts and Jobs Act.

The only people not rushing through the backdoor are those individuals with existing taxable traditional, SEP or SIMPLE funds. They will get stuck with a tax bill on the conversion due to the complicated pro-rata formula rules that apply to conversions. Even these unlucky individuals can still do a backdoor Roth IRA as long as they are willing to pay the taxes on the conversion.

Unnecessary complications. While the backdoor may be a way to fund a Roth IRA, it does complicate things unnecessarily. You must make a contribution to a traditional IRA. If you do not have one, it must be established. Then, when the contribution is made, it must be reported as nondeductible on Form 8606. Then, a conversion must be done and reported by both you and your IRA custodian. This must happen each year a backdoor Roth IRA conversion is done. That’s a lot of work and potential for mistakes. If the new Congress is serious about doing away with red tape and simplifying unnecessary rules, getting rid of the income limits on Roth contributions would certainly seem to be a good place to start. Imagine how much easier it would be to just contribute directly to a Roth IRA.

No other Roth saving strategies have income limits. Over the years since the Roth IRA became a reality back in 1998, we have seen Congress establish a long list of other Roth options. None of them have income limits like tax-year Roth IRA contributions do. Congress did away with the income limits for Roth IRA conversions in 2010. Roth 401(k) and Roth SEP and SIMPLE IRA contributions are available to all regardless of income level. In fact, next year some high earners will be forced to make their catch-up plan contributions on a Roth basis instead of as a pre-tax salary deferral. With all these Roth options available to high income savers, it makes no sense to keep the Roth IRA contribution limits.

Roth accounts raise revenue. Congress loves Roth accounts because they bring in immediate revenue since they are funded with after-tax dollars. So, why not allow high income individuals to save for retirement by making direct Roth IRA contributions? This will generate more current revenue and allow more savers to work more easily towards a secure retirement.

The income limits don’t work. If the goal of the income limits on Roth contributions is to keep high income individuals from taking advantage of the Roth IRA strategy, it has not worked. A few years ago, the story of one tech billionaire’s large Roth IRA made headlines. According to reports, his Roth IRA was started with a tax year contribution. Twenty-two years later, it was worth five billion dollars. The income limits did not prevent one of the richest men in the world from amassing a fortune in a Roth IRA. They serve no purpose and Congress should do away with them now!

https://irahelp.com/slottreport/one-roth-ira-rule-congress-should-do-away-with-now/

By Andy Ives, CFP®, AIF®
IRA Analyst

QUESTION:

My wife has two after-tax traditional IRAs at two separate institutions. We are hoping to consolidate them, then convert to a Roth in the next 18 months. She is already retired. She also has an inherited IRA (from her father). Does the calculation for taxation on the conversion to Roth need to include the assets in the inherited IRA? Do assets in my IRA have any impact on the calculation?

ANSWER:

The calculation you are speaking of is the pro-rata rule. When an IRA containing after-tax (non-deductible) dollars is totally or partially converted, we must determine the ratio of how much of the conversion is taxable and how much is tax-free. (You cannot target just the after-tax dollars and only convert those.) There is no problem with your wife consolidating her “after-tax IRAs.” Subsequently, when she does a conversion, her inherited IRA is disregarded for the pro-rata calculation as are any IRAs you (as her spouse) have.

QUESTION:

There seems to be some confusion about a 5-year rule as it applies to Roth IRA conversions. I am under the strong impression that if you are over age 59½ and you convert $100,000 and pay the taxes due on that conversion, then that money is now available for use or withdrawal from the Roth IRA with no taxes. For example, if I am age 65 and find that I need $25,000 next summer after doing a $100,000 conversion less than 5 years ago, do I have to pay taxes on this withdrawal? I already paid the taxes on the converted amount, I don’t think so, but I can’t find anything on the IRS website, or even any articles online, that prove I am correct.

Robert

ANSWER:

Robert,

You are correct. In the scenario you outlined, there would be no taxes due on that $25,000 withdrawal from your Roth IRA. Roth IRA distributions follow strict ordering rules. Contributions come out first, then converted dollars, then earnings. Assuming there were no contributions in your Roth IRA, if you did a $100,000 Roth conversion and then took a $25,000 distribution, that distribution would be comprised entirely of converted dollars. Converted dollars are always available TAX-free, regardless of age, because as you said, you already paid the taxes due on those dollars when you did the conversion. (And, since you are over age 59½, the converted amounts come out PENALTY-free as well.)

https://irahelp.com/slottreport/the-pro-rata-rule-and-roth-conversions-todays-slott-report-mailbag/

By Ian Berger, JD
IRA Analyst

One of the more controversial rules in the 2022 SECURE 2.0 Act is the requirement that plan catch-up contributions by certain highly-paid employees be made on a Roth basis. Last Friday, (January 10, 2025) the IRS issued proposed regulations on the new rule.

Congress intended for the Roth catch-up mandate to be effective on January 1, 2024. However, in response to a flood of complaints, the IRS in Notice 2023-62 delayed the effective date until January 1, 2026. The delay means that until next year, plans can continue to accept pre-tax catch-up contributions from all employees (including high-paid).

The proposed regulations are not technically effective until after the IRS issues final regulations. But plans are allowed to follow them in the interim. Since the regulations are mostly taxpayer-friendly, most plans will want to do that.

The regulations confirm several unanswered questions about the new mandatory Roth catch-up contribution, most of which were originally addressed in Notice 2023-62:

• The Roth mandate applies to 401(k), 403(b) and governmental 457(b) plans – but not to SIMPLE IRA plans.
• The requirement only applies to employees with “wages” from the employer in the preceding year that exceeds a dollar threshold. The IRS confirmed that “wages” means wages subject to FICA; that is, amounts reported on Box 3 (not Box 1) of W-2. The dollar threshold would have been $145,000 in 2023 wages for 2024 and would have remained $145,000 in 2024 wages for 2025. But it will go up in future years based on inflation. The threshold on 2025 wages for determining required Roth catch-up contributions for 2026 (when the rule becomes effective) will not be available until the end of this year.
• Self-employed individuals have self-employment income, not wages. If a self-employed person’s income exceeds the dollar limit in the prior year, is she required to make catch-ups on a Roth basis?  The IRS says no. Only high-paid workers with actual “wages” are subject to the Roth rule.
• The look-back wage rule means that new employees — no matter how well paid — will get a free pass in their first year of employment (because they have no wages the previous year from the new company). And, because the IRS says the dollar threshold is not pro-rated for the first year of employment, some highly-paid employees also will not be affected in their second year of employment.
• One important issue the IRS punted on in 2023 was addressed in the new regulations: What if a plan doesn’t already offer Roth contributions (since they are optional)? The IRS says it will not force an employer to put in a Roth option. But if a plan does not have a Roth option, pre-tax catch-ups could only be made available to lower-paid employees (i.e., those who would not have been subject to the mandatory Roth rule). Higher-paid employees could not make any catch-ups – pre-tax or Roth. Of course, most employers would be uncomfortable with this arrangement because it would alienate its highest-earning employees. So, the practical impact is that plans without a Roth contribution option will likely have to introduce one for 2026.

This is the only mandatory Roth rule in SECURE 2.0. Many affected employees may be better off making catch-up contributions on a Roth basis anyhow, but starting next year they will have no choice.

We are two weeks into 2025. Have you been following through on your New Year’s resolutions? As our readers already know, for an IRA owner not to follow through on his or her annual check up of beneficiary forms could have dire consequences.
Repeat after me: In 2025, I will…

• Obtain a copy of the beneficiary form for each IRA I own.
• Ensure I have named a primary beneficiary and a secondary (contingent) beneficiary for each IRA I own.
• If there are multiple beneficiaries, make sure that each beneficiary’s share is clearly identified with a fraction, a percentage or the word “equally” if applicable.
• Ensure that the financial institution has my beneficiary selections on file and that their records agree with my choices.
• Keep a copy of all my IRA beneficiary forms and give copies to my financial advisor and attorney.
• Let my beneficiaries know where to locate my beneficiary forms.
• Review my beneficiary forms at least once per year to make sure they are correct and reflect any changes during the year due to new tax laws or major life events, such as death, birth, adoption, marriage, re-marriage or divorce.
• Check the IRA custodial document for every financial institution that holds my IRA funds. I will make sure that the financial institution allows the provisions that are important to me and my IRA beneficiaries.
• Do all of the above for any company retirement plan accounts I have, like 401(k)s, 403(b)s, or 457 plans.

https://irahelp.com/slottreport/beneficiary-form-resolutions/

By Ian Berger, JD
IRA Analyst

Question:

I am planning for a required minimum distribution (RMD) from both my IRA and 403(b) plan for 2026, my first RMD year. I am in the third year of a 10-year period in which I am rolling over 10% of my 403(b) funds each year to my IRA as a way to consolidate. This is per my 403(b) contract. The funds get rolled over in September each year.

In 2026, do I need to take my RMD before the 10% rollover on the balance of my 403(b)? Are there regulations or just preference as to when I should take the RMD?

Claudia

Answer:

Hi Claudia,

Yes, starting in 2026, you will need to take your RMD from the 403(b) plan before doing the rollover to the IRA. That’s because the first dollars paid out of the 403(b) in any RMD year are considered the RMD, and RMDs cannot be rolled over. There is no rule requiring you to take the RMD at any particular time during the year, as long as it is taken before your rollover in September.

Question:

I believe that my RMD can be taken from any account to satisfy the total RMD, but does that apply to different types as accounts such as an IRA and a 401(k)? A related question: Can I use a qualified charitable distribution (QCD) from an IRA to satisfy the RMD for both my IRA and 401(k)?

Thanks for any insights you can provide.

John

Answer:

Hi John,

You can satisfy the total RMDs of all of your IRAs (and any SEP or SIMPLE IRA) from any IRA (or SEP or SIMPLE). But RMDs from IRAs and retirement plans, like 401(k)s, must be taken separately. Meanwhile, a QCD can only be used to satisfy an IRA RMD.

https://irahelp.com/slottreport/rmd-rollover-and-aggregation-rules-todays-slott-report-mailbag/

By Ian Berger, JD
IRA Analyst

When the ball dropped in Times Square on New Year’s Eve, a number of new retirement account provisions became effective. We’ve previously written about each of these new rules in The Slott Report. This article will serve as a checklist, with links to the prior articles.

• As happens frequently, many retirement account dollar amounts increased in 2025 as a result of indexing for inflation. For example, the 2025 regular (non-catch-up) elective deferral limit for 401(k), 403(b) and 457(b) plans went up from $23,000 to $23,500. In addition, the SEP contribution limit increased to 25% of up to $350,000 in pay, but no more than $70,000. Here’s a link to our November 6, 2024, Slott Report article with more details: irahelp.com/slottreport/401k-contribution-limits-increase-for-2025/.

• A big change to the required minimum distribution (RMD) rules made by the 2019 SECURE Act requires most non-spouse retirement account beneficiaries to empty the inherited account by the end of the 10^th year following the year of death. IRS regulations also mandate that any beneficiary subject to the 10-year rule who inherited from someone who had started RMDs must continue them during years 1-9 of the 10-year period. However, because of confusion over this rule, the IRS did not require annual RMDs for beneficiaries in this category for years 2021-2024. Starting this year, yearly RMDs become due. See the following Slott Report post from November 11, 2024, for more information: irahelp.com/slottreport/annual-rmds-for-certain-beneficiaries-kick-in-soon/.

• Several new rules for retirement plans have kicked in. Many new 401(k) and 403(b) plans will be required to include an automatic enrollment feature. This means that eligible employees will be required to make elective deferrals unless they opt out. In addition, it’s now harder for plans to keep out part-time employees. Any employee who has worked at least 500 hours in two consecutive 12-month periods (but excluding periods before 2023), and who is age 21 or older, must be allowed to participate. Both of those provisions are discussed in more detail in the December 2, 2024, post on the Slott Report: irahelp.com/slottreport/new-401k-provisions-that-become-effective-in-2025/.

• Last but not least, Congress has increased catch-up contribution opportunities for certain older employees in 401(k), 403(b) and governmental 457(b) plans starting this year. This “super catch-up” is higher than the current age-50-or-older catch-up — for 2025, it is $11,250. The super catch-up is available only to those who are age 60, 61, 62 or 63 on the last day of the year.

  A super catch-up ($5,250 for 2025) also applies to age 60-63 SIMPLE IRA participants. This means that employees in SIMPLE plans will be subject to one of three different catch-up limits, depending on their age and the size of their employer. These two Slott Report articles from October 21, 2024, and November 20, 2024, attempt to clear up this confusing topic: https://irahelp.com/slottreport/nothing-simple-about-it-3-different-catch-up-limits-for-2025/.

• https://irahelp.com/slottreport/whats-new-for-2025/

By Sarah Brenner, JD
Director of Retirement Education

The year 2025 is upon us! There is no doubt that this will be an eventful time for retirement accounts. As the new year kicks off, here is what we are talking about now at the Slott Report.

1. Increased contribution opportunities. New catch-up contribution options for certain older individuals are here!

For 2025, those who are age 50 or older can contribute an additional $7,500 as salary deferrals to their employer plan. However, those who are aged 60, 61, 62 or 63 at year’s end can contribute even more. They can contribute an additional $11,250 — instead of $7,500.

For SIMPLE IRA plans, those who are age 50 or older can contribute an additional $3,500. The SECURE 2.0 Act also increased the SIMPLE IRA catch-up contribution limit for certain individuals. For 2024 and 2025, the catch-up contribution limit for a business with 25 or fewer employees is automatically increased to $3,850. Businesses with 26 – 100 employees can allow this higher contribution limit, but only if they provide a 4% (instead of 3%) matching contribution, or a 3% (instead of 2%) across-the-board contribution.

Additionally, for 2025, those SIMPLE IRA plan participants who are aged 60, 61, 62 or 63 at year’s end can contribute an additional $5,250 — instead of $3,500 or $3,850.

At the Slott Report, we are getting many questions on how these new complicated rules work, so expect to see some deep dives into the all the details in upcoming posts.

2. Potential tax law changes. Whenever a new administration takes over, the chances for big legislative changes go up.This year, the odds increase even more with one-party control of both the Presidency and Congress. When you add to the mix the fact that the individual tax provisions from the Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025, the possibility of significant tax law changes is real.

There is no doubt that retirement savings will be impacted as Congress takes on the tax code. We will be following it all here at the Slott Report.

3. More Roth opportunities. With new tax legislation and breaks, inevitably comes discussion of how to pay for it all. Roth accounts often are part of the answer. Congress loves Roth accounts because they bring in immediate revenue. Roth accounts have proliferated. We now have Roth SEP and SIMPLE IRAs, and mandatory Roth catch-up contributions are scheduled to begin in 2026 for some high-income earners. The lead-up to TCJA back in 2017 even brought discussions of all 401(k) contributions being required to be Roth.

We at the Slott Report expect to see many more Roth opportunities in 2025 and future years.

4. Recent and upcoming regulations. The year 2024 brought us both long-awaited final SECURE Act regulations and proposed SECURE 2.0 regulations.In 2025, we know that annual required minimum distributions (RMDs) will be mandatory during the 10-year rule for many beneficiaries, and we know how the new rules for spouse beneficiaries will work.

At the Slott Report, we will be watching how these new rules are put into practice as well as monitoring any new guidance from the IRS. We are still eagerly awaiting guidance on more issues such as rollovers from 529 plans to Roth IRAs. Stay tuned for future updates.

5. Distribution planning. There has always been a focus on the importance of accumulating retirement savings. However, as the baby boomer generation reaches retirement age, it has become increasingly apparent that, as important as saving for retirement is, when it comes to tax advantage retirement accounts, it is equally important to focus on distribution planning. Doing so allows savers to keep more of their hard-earned money, instead of giving it over to Uncle Sam.

Here at the Slott Report, we expect to focus more on this part of the retirement savings process in 2025.

Stay tuned! The year ahead promises to be an exciting one. We hope you continue to follow the Slott Report for all the latest retirement account news, analysis and discussion!

https://irahelp.com/slottreport/5-things-we-are-talking-about-at-the-slott-report-in-2025/

By Sarah Brenner, JD
Director of Retirement Education

Question:

Hello,

Our daughter (age 50) is the sole beneficiary of her husband’s (age 52) IRA due to his death in April 2024. Is there a time limit for when she must either take ownership or roll it over into her own IRA or other qualified plan?

Thank you,

Marylou Pagano

Answer:

Hi MaryLou,

Our condolences on the death of your son-in-law.

Your daughter as a spouse beneficiary has some options. She may consider keeping the IRA as an inherited IRA. If she does a spousal rollover into her own IRA and then needs to take a distribution, she will be subject to the 10% early distribution penalty because she is under age 59½. By delaying a spousal rollover and keeping the account as an inherited IRA, she would avoid this penalty because it does not apply to inherited accounts.

No distributions would be required from the inherited IRA until the year that the deceased IRA owner would have been age 73. She can still do a spousal rollover into her own IRA at any time. There is no time limit or deadline for this.

Question:

I have an 87-year-old mother who passed away after her required beginning date with three children as beneficiaries. They are each subject to the 10-year rule. Are the annual required minimum distributions (RMDs) based on the beneficiaries’ life expectancies or are they based on the original owner (87-year-old mother’s) life expectancy?

Thank you,

Janine

Answer:

Hi Janine,

You are correct that the beneficiaries in this case would be subject to the 10-year rule and would have to take annual RMDs during the 10-year period. Those annual RMDs would be based on the beneficiaries’ single life expectancies.

https://irahelp.com/slottreport/spousal-beneficiaries-and-the-10-year-rule-todays-slott-report-mailbag/

By Andy Ives, CFP®, AIF®
IRA Analyst

I counted them. This year the Slott Report published 101 blog articles. While other sites add “pay-for-content” firewalls, we continue to pump out incredibly valuable and important information, week after week, totally free of charge. One would be hard-pressed to find an IRA or retirement plan topic we did not touch in 2024. Yes, the Slott Report is the gift that keeps on giving: the IRA version of the Jelly-of-the-Month Club.

In the Q&A Mailbag, we answered 200 retirement-related questions. Hopefully our responses pointed readers in the right direction. This is a crazy, mixed-up industry we work in, and we understand the rules are complex. If our answers helped anyone avoid the IRS Grinch, then it was well worth the effort.

From Ed, Sarah, Ian and me: Thank you for reading! We wish you a wonderful holiday season and Happy New Year! (See you in 2025 for another 100+ new jelly flavors.)

https://irahelp.com/slottreport/jelly-of-the-month-club/

By Ian Berger, JD
IRA Analyst

This is the time of year for good cheer and holiday wishes. In keeping with those traditions, here are some cheers and wishes for the IRS and Congress:

Cheers to the IRS: Yes, it did take the IRS 4½ years to issue final required minimum distribution (RMD) SECURE Act regulations in July 2024. But the IRS does deserve credit for addressing most of the unanswered questions raised by the SECURE Act and the 2022 proposed regulations. And, aside from the IRS’s stubborn interpretation of the at-least-as-rapidly rule, the final regulations were taxpayer-friendly. The same is true for the proposed SECURE 2.0 regulations issued at the same time.

Wish for the IRS: We cannot let theIRS off the hook completely. In SECURE Act 2.0, Congress added a much-appreciated provision that started in 2024; it allows owners of unused 529 accounts to transfer up to $35,000 of surplus funds tax-free to a Roth IRA for the benefit of the 529 beneficiary. The new law requires that the 529 account must have been held for at least 15 years but fails to address one basic question: If the 529 beneficiary changes, does the 15-year clock start over again or can you get credit for the period with the prior 529 beneficiary? The new law has now been in effect for a full year, but we still have zero guidance from the IRS on this crucial issue.

Cheers to Congress: This year, unlike in December 2019 and 2022, Congress did not hit us with a last-minute piece of legislation that would make massive changes to the IRA and employer plan tax rules. However, there is already talk that Congress may include provisions in the next tax bill that will require more mandatory Roth contributions. (SECURE 2.0 already requires that, starting in 2026, highly-paid employees who want to make 401(k) catch-up contributions must make them on a Roth basis.) The additional revenue from more “Rothification” would help pay for the renewal of the tax cuts in the 2017 Tax Cuts and Jobs Act, which are due to expire on December 31, 2025. So, next year we may not be so lucky!

Wish for Congress: It may be too big of an ask, but it is long overdue for Congress to start simplifying the retirement account tax rules instead of just piling new complicated rules on top of existing complicated rules. Need some examples? There are now 20 different exceptions to the 10% early distribution penalty (3 of which apply only to IRAs, 6 of which only apply to employer plans, and 11 of which apply to both); 8 different beneficiary RMD rules, depending on when the account owner died and into what category the beneficiary fits; 4 different ages for when RMDs are first due: ages 70½, 72, 73 (and eventually) 75; and 3 different catch-up contribution limits for SIMPLE (!!) plan participants. (And a partridge in a pear tree.)

Cheers and Wishes to You: We would be remiss if we did not give cheers to you, our loyal Slott Report readers, for checking in with us every Monday, Wednesday and Thursday, and for sending us such great questions. Best wishes for a Happy Holiday season!

https://irahelp.com/slottreport/holiday-cheers-and-wishes/

By Andy Ives, CFP®, AIF®
IRA Analyst

QUESTION:

If a client opens an IRA at age 75 and makes a contribution this year, this account would not have a required minimum distribution (RMD) for 2024, correct? Since the IRA did not exist last year, there is no 12/31/23 balance.

ANSWER:

You are correct, there would be no RMD in the scenario you outlined. RMDs are calculated using the prior year-end balance. With no 2023 year-end balance, there is no RMD to calculate. Just be sure the person has earned income and is eligible to make an IRA contribution.

QUESTION:

Can you distribute stock in-kind from an IRA account to a non-IRA brokerage account to satisfy an RMD?

Thank you,

Jessica

ANSWER:

Jessica,

Yes, an in-kind distribution of stock can be used to satisfy an RMD. The value of the shares on the date of distribution is used when determining the amount of the withdrawal, so be sure to distribute enough shares to cover the RMD.

By Sarah Brenner, JD
Director of Retirement Education

The IRA rollover rules are always tricky. However, if you are rolling over an IRA distribution when the calendar year changes, the rules can become especially challenging. Here are four things you need to know about rollovers as the year 2024 ends and the year 2025 arrives.

1. A distribution taken in one year can be rolled over in the next year.

Surprisingly, sometimes IRA owners have doubts as to whether a distribution taken in one calendar year can even be rolled over in the next. There is no problem with this! Nothing prevents you from taking an IRA distribution in December of 2024 and rolling it over in January of 2025. Just be sure that you follow all the rollover rules that always apply, such as the 60-day rollover deadline.

2. Report the rollover on your 2024 tax return.

Another concern you may have is how to handle a distribution from your IRA in 2024 that you roll over in 2025 on your tax return. Do you report this transaction on your 2024 tax return or wait for 2025? Here is how it works. The IRA custodian will report the distribution from your IRA on a 2024 Form 1099-R. The rollover will be reported by the IRA custodian on a 2025 Form 5498. You will report the distribution and the rollover on your 2024 federal income tax return.

3. Watch out for the once-per-year rollover rule.

Do not fall for a common misunderstanding of the one-rollover-per-year rule. The rule says that you may only roll over one distribution from all of your IRAs in a one-year period. The one rollover per year does not apply on a calendar year basis. It begins with the date you receive the distribution you later roll over. A new calendar year does not mean you have a clean slate. If you take an IRA distribution on December 15, 2024, and roll it over in January of 2025, you may not roll over another IRA distribution until December 16, 2025.

4. Be sure to calculate your 2025 RMD correctly.

A rollover that is outstanding at the end of the year can affect your 2025 RMD. If you take a distribution in 2024 and complete a rollover of those funds in 2025, you must include the amount rolled over in your December 31, 2024, fair market value when calculating your 2025 RMD. This rule prevents IRA owners from avoiding RMDs by having an IRA balance of zero on December 31. You cannot escape your RMD by emptying out your IRA in December and then rolling over the funds in January.

https://irahelp.com/slottreport/4-things-to-know-about-rollovers-between-calendar-years/

By Andy Ives, CFP®, AIF®
IRA Analyst

Tis the season for giving, and qualified charitable distributions (QCDs) are a popular way to donate to a favorite charity. However, rules must be followed. In a recent Slott Report entry (“QCD Timing,” December 4), I included the following closing line: “Some IRA accounts allow check-writing privileges. Checks written to a charity from a ‘checkbook IRA’ qualify as a valid QCD. However, the custodian may not recognize the distribution until the check is cashed! That could be in early 2025…and then we have problems.”

What are these “problems” alluded to? If a QCD check is not cashed by the charity until early 2025, it will not count for a 2024 QCD. It does not matter that the check was written or dated in late 2024. The distribution must leave the IRA (i.e., the check must be cashed) by December 31. The custodian cannot and will not police when the check was delivered to the charity. The custodian can only monitor and report when the check is cashed, thereby initiating the actual distribution from the account.

If the QCD check written in late 2024 results in a distribution not officially being executed until early 2025, there are additional potential pitfalls to dance around. For example, if the intent was to use the QCD to offset all or a portion of a 2024 required minimum distribution (RMD), then we have a missed RMD situation. A penalty of 25% could apply if proper corrective action is not taken, and that is a scenario no one wants to tango with.

Additionally, with the QCD intended for 2024 being pushed into 2025, that QCD amount eats into the 2025 QCD cap of $108,000. If the IRA owner wants to donate the full amount to charity in 2025, the late-cashed check (intended for 2024) will have the unintended consequence of cutting into the 2025 QCD cap.

Note that QCDs still cannot be done from work plans like a 401(k). The QCD must come from an IRA. This rule leaves some donors scrambling to find a partner, and makes wallflowers out of others with no options. For any retirees turning 73 in 2025 who still have dollars in their 401(k), those plan assets must be moved to an IRA before the end of 2024 if the goal is to offset future RMDs with a QCD. Why the urgency? For anyone (not still working) who turns 73 in 2025, the first RMD year will be 2025. Rolling the 401(k) to an IRA next year and THEN offsetting the plan RMD with a QCD from the IRA will not work. RMDs cannot be rolled over. If you wait until 2025, the 2025 plan RMD must be withdrawn prior to the rollover, thereby eliminating the ability to offset that RMD with a QCD.

For those retired 401(k) participants who are already age 73 or older, the 2024 music has already stopped. You must take your 2024 plan RMD before doing any rollovers to an IRA. As such, the 2024 RMD must be withdrawn from the plan and cannot be offset with a QCD.

Of course, going forward, all will be well. With all plan dollars rolled over to an IRA, future IRA RMDs can be sent to whatever qualifying charity you wish via QCD. But until the plan dollars are in that IRA, we must do this plan RMD/rollover timing/QCD dance.

https://irahelp.com/slottreport/the-qcd-dance/

By Sarah Brenner, JD
Director of Retirement Education

Question:

Can a person do a rollover from both his traditional AND Roth IRAs in the same twelve months?

Best regards,

Matthew

Answer:

Hi Matthew,

The once-per-year rollover rule restricts an individual from rolling over more than one IRA distribution during a 365-day period. For purposes of this rule, traditional and Roth IRAs are aggregated. If you have both types of IRAs, you can only do one rollover from either the traditional IRA or the Roth in a one-year period.

Question:

I have a 60-year-old client who has the opportunity to contribute to a Roth 401(k). Is he permitted to contribute to both his Roth 401(k) and his Roth IRA?  Are there limits?
Thanks for your help!

Linda

Answer:

Hi Linda,

To fully fund a Roth IRA, you must have earned income. Additionally, your modified adjusted gross income (MAGI) for 2024 must be under $230,000 if married filing jointly (or under $146,000 if filing single). If he meets these requirements, he can fund both the Roth 401(k) and the Roth IRA. Funding one does not affect the other.

https://irahelp.com/slottreport/ira-rollovers-and-roth-contributions-todays-slott-report-mailbag/

By Sarah Brenner, JD
Director of Retirement Education

The holidays are upon us. There is shopping to do, gifts to wrap, and parties to attend. Amidst the hustle and bustle of the season, you may be forgiven if your retirement account is not at the top of your mind. However, for some retirement account owners and beneficiaries, a very important deadline is looming. December 31 is the deadline to take 2024 required minimum distributions (RMDs) for many individuals.

Retirement Account Owners

Which IRA owners must take an RMD for 2024? If you have a traditional, SEP, or SIMPLE IRA and you are age 74 or older in 2024, you must take an RMD by the end of this year. Also, if you are age 74 or older and have funds in an employer plan such as a 401(k) and you are not eligible to take advantage of the “still-working” exception, you must take a 2024 RMD.

If you have reached age 73 in 2024, you catch a break. You do not need to take your 2024 RMD until April 1, 2025. However, if you wait until next year to take your 2024 RMD, you will need to take two RMDs in 2025 because you are required to take your 2025 RMD by December 31, 2025.

What if you have a Roth account? You are in luck! You are never required to take RMDs from your Roth account in your lifetime.

Retirement Account Beneficiaries

Many retirement account beneficiaries need to take their 2024 RMD by December 31. If you inherited a retirement account before 2020 and you are using the stretch provision under the old rules, you must take your 2024 RMD by the end of the year. Also, if you inherited an account in 2020 or later and you are an eligible designated beneficiary (EDB), you must take an RMD by the end of 2024.

Although Roth accounts are not subject to an RMD requirement while the owner is alive, annual RMDs do apply to Roth beneficiaries who inherited before 2020 and to Roth IRA EDBs who inherited in 2020 or later and chose the stretch option.

Beneficiaries who are subject to both the 10-year rule under the SECURE Act and the final RMD regulations requirement that annual RMDs must be taken during it do not have to take an RMD for 2024. Due to all the confusion over these rules, the IRS has again waived the RMD requirement within the 10-year period. This waiver only applies to this specific group of beneficiaries and only applies for 2024. Going forward, beginning next year, if you are in this situation, you must take those annual RMDs during the 10-year period.

Don’t Delay

You may be thinking it is still early in December, so I have plenty of time to take my 2024 RMD. Do not delay! Many financial organizations have cutoff dates for processing transactions for 2024 that are much earlier than December 31. Add in end of the year staff vacations and waiting until the last minute to take your 2024 RMD is a recipe for trouble. Failing to take your RMD will result in a 25% penalty. Get it done now and enjoy the holidays!

https://irahelp.com/slottreport/who-must-take-a-2024-rmd/

By Ian Berger, JD
IRA Analyst

Question:

If you continue to work past age 73, are you exempt from required minimum distributions (RMDs)? My 73 year-old wife is still working and contributing to her company’s 401(k), and she doesn’t own more than 5% of the company. Is she required to take out any RMD?

Could you please clarify this rule for me? Thank you.

Answer:

Assuming your wife’s plan allows it (most do), she can defer RMDs until her retirement under the “still-working exception.” That exception is not available for anyone who owns more than 5% of the company maintaining the plan. Even though she can defer RMDs from her 401(k), your wife must still take RMDs from any IRA starting this year.

Question:

I have a question about the new rule that requires that all IRA required minimum distributions (RMDs) must be satisfied prior to doing a Roth IRA conversion.

If the only RMD I have to take is from an inherited IRA (I am only 65 years old), then does this rule come into play? I was planning on doing my Roth conversion early in January 2025, but the RMD from my inherited IRA can’t easily be taken until April 2025 (when my CDs mature). Does this rule apply to inherited IRA RMDs?

Thanks,

Brian

Answer:

Hi Brian,

Good question! No, the rule requiring that RMDs from all IRAs must be taken before a Roth conversion (or 60-day rollover) is done only applies to your own IRAs — not IRAs that you have inherited. So, you can do the Roth conversion before you take the RMD from your inherited IRA.

https://irahelp.com/slottreport/the-still-working-exception-and-roth-conversions-in-an-rmd-year-todays-slott-report-mailbag/

By Andy Ives, CFP®, AIF®
IRA Analyst

Year after year, this topic continues to bubble up. Confusion exists over when a QCD can be done in relation to the RMD. Qualified charitable distributions (QCDs) can offset all or a portion of an RMD (required minimum distribution). However, for whatever reason, the sequencing of these items (QCDs and RMDs) confounds people. Let’s set the record straight, starting with some QCD fundamentals:

• QCDS are only available to IRA owners who are age 70½ and over.
• For 2024, the QCD cap is $105,000. (This cap increases to $108,000 in 2025.)
• QCDs cannot be done from employer plans – like a 401(k).
• Yes, QCDs can be done from an inherited IRA if the owner is 70 ½ or older. (It does not matter how old the now-deceased previous owner was.)
• Donations paid directly from an IRA to an eligible charity may be excluded from income. However, there can be no benefit back to the taxpayer.

That’s the easy part. This next section is where the confusion starts:

A popular recommendation is to execute a QCD early in the year to avoid any conflict with the “first-dollars-out rule.” The first dollars withdrawn from an IRA are deemed to count toward the RMD. Once an RMD is taken, it cannot be retroactively offset with a later QCD. Hence the advice to do your QCDs early to avoid this mistake.

Example: John is 75 in 2024. The RMD on his IRA is $5,000. John committed to his church that he would gift this full amount. Prior to doing any QCDs, John takes a $2,000 distribution from his IRA in January 2024 to help pay the credit card bills from the previous holiday. Now it is December 2024. John informs his advisor that he would like to offset his entire RMD with a QCD. John cannot retroactively offset the $2,000 he took back in January. That $2,000 will be taxable. Since John has $3,000 remaining on his 2024 RMD, he has a handful of QCD options:

• John can do a $3,000 QCD to his church to offset the remaining portion of his RMD, but this would leave him short of his donation commitment.
• To meet his commitment, John can still do a $5,000 QCD to his church. This will result in $7,000 being withdrawn from his IRA for the year. This is perfectly acceptable, assuming John is willing to withdraw more than his RMD.
• In fact, John could do a QCD of $105,000 to his church. The total QCD amount is NOT limited to the RMD amount. The end result would be $107,000 distributed from his IRA, with only $2,000 being taxable to John.

The point is that QCDs can be done at any time throughout the year. QCDs can also be done after all or a portion of the RMD has already been taken. The only reason it is suggested to do QCDs early is to avoid what John did – mistakenly take a taxable distribution that cannot be retroactively offset with a future QCD.

End Note: Since 2024 is coming to a close, there is another reason to do QCDs early: Some IRA accounts allow check-writing privileges. Checks written to a charity from a “checkbook IRA” qualify as a valid QCD. However, the custodian may not recognize the distribution until the check is cashed! That could be in early 2025…and then we have problems.

https://irahelp.com/slottreport/qcd-timing/

By Ian Berger, JD
IRA Analyst

Get ready! Several new 401(k) provisions from the SECURE 2.0 Act kick in on January 1, 2025. One that we’ve already written about is the ability of employees to make extra catch-up contributions in a year they turn age 60, 61, 62 or 63 by the end of the year. (This “super catch-up” also applies to SIMPLE IRA participants.) Here are two others:

Automatic Enrollment

Most newly-established 401(k) (and 403(b) plans will be required to institute automatic enrollment. This requirement doesn’t apply to plans established before December 29, 2022 – the date SECURE 2.0 was enacted. It also doesn’t apply to plans started by employers with 10 or fewer employees, new employers (those that have been in business for less than three years), and church-sponsored plans, governmental plans or SIMPLE plans. Of course, existing plans have been (and continue to be) free to institute automatic enrollment if they want.

What does automatic enrollment mean? It means that, unless they opt out, covered employees will be required to make elective deferrals. The employer can set the deferral rate for those who don’t opt out – as long as the rate is at least 3% of pay and no more than 10% of pay. Each year after that, the employer must increase the required deferral rate by 1% until it reaches a rate of at least 10% and no more than 15% of pay.

A number of studies have shown that automatic enrollment is an effective way of boosting participation in 401(k) plans. However, some critics have argued that many employees are effectively duped into contributing when they can’t afford it since they aren’t aware of the opportunity to opt out.

Participation by Part-Time Employees

Before the SECURE Act, 401(k) plans could exclude part-time employees if they did not work at least 1,000 hours of service in a 12-month period or were under age 21. These rules have prevented many long-term part-timers from the opportunity to save in 401(k) plans.

The SECURE Act provided relief by requiring plans to permit any employee who has worked at least 500 hours in three consecutive 12-month periods (but excluding periods before 2021), and who is age 21 or older by the end of the three-year period, to start making elective deferrals. This allowed many previously ineligible part-time employees hired in 2021 or earlier to start participating on January 1, 2024.

In SECURE 2.0, Congress kept the age-21 requirement, but shortened the consecutive 12-month periods from three to two (but excluding periods before 2023). This means many part-timers hired in 2023 or earlier and not already eligible will be able to start saving as of January 1, 2025.

Employers are free to apply more liberal eligibility rules for their 401(k) plan. Also, neither the SECURE Act nor the SECURE 2.0 rules replace the pre-SECURE Act 1,000-hour/age 21 rule if that rule allows an employee to participate earlier than under the new rules. Finally, keep in mind that these part-time rules only apply for purposes of eligibility for elective deferrals – not eligibility for employer contributions.

Besides 401(k)s, the new SECURE 2.0 rule also covers part-timers under ERISA-covered 403(b) plans, starting January 1, 2025.

https://irahelp.com/slottreport/new-401k-provisions-that-become-effective-in-2025/

Sarah Brenner, JD
Director of Retirement Education

Each year it is a Thanksgiving tradition here at the Slott Report to take a moment to give thanks for the rules that are helpful to retirement savers. There are many times when rules governing retirement accounts can seem illogical, confusing, and maybe even unfair. However, there are other rules that work well and give us the tools necessary to not only save for a secure retirement but maybe even get a few tax breaks along the way.

Here are a few retirement account rules for which we are thankful in 2024:

All Things Roth!  – Who doesn’t love tax-free savings? With Roth accounts, qualified distributions in retirement are tax-free. The Roth IRA first became available in 1998. Since then, Roth savings opportunities have grown. Roth employee deferrals are now common, Roth employer contributions accounts are now available, and millions of retirement savers have done Roth conversions. Roth savings continue to grow under the recent SECURE Act and SECURE 2.0 and for this we are thankful.

New Rules for Spouse Beneficiaries – Believe it or not we are feeling thankful for the IRS. The SECURE 2.0 Act upended the rules for spouses who inherit retirement accounts and left confusion in its wake. This year the IRS stepped in and provided some much-needed guidance. The recently released regulations provide unexpected clarity on the new rules and expand the advantages to spouse beneficiaries of retirement accounts.

The NUA Strategy – In 2024, with the markets booming, many individuals have seen substantial growth in their retirement plan balances. If the account includes company stock, then it can be a good strategy to distribute that stock in-kind to a nonqualified account to take advantage of lower capital gains rates on the net unrealized appreciation (NUA). For this tax break, we are grateful!

Portability. Nowadays people change jobs frequently. The days of staying in one job for life and retiring with a pension are long gone. We give thanks for the rules which recognize the increased mobility of the workforce and allow more portability between retirement plans. Rollovers from plans to IRAs and trustee-to-trustee transfers between IRAs allow us to protect and maximize our retirement savings.

Qualified Charitable Distributions – A QCD allows an IRA owner to move funds from her IRA to charity tax-free. A QCD is a great way to get a tax break for giving if you are charitably inclined and use the standard deduction. A QCD can also satisfy an RMD. What is not to like? We are grateful for this tax break that not only helps the IRA owner but also contributes to the greater good.

Happy Thanksgiving from all of us at the Slott Report!

https://irahelp.com/slottreport/what-we-are-thankful-for-at-the-slott-report/

By Andy Ives, CFP®, AIF®
IRA Analyst

When an IRA owner dies, what is the payout schedule for the beneficiary? The key to distinguishing the correct program (i.e., 10-year rule, stretch RMDs, 5-year rule, etc.) is to identify all the important variables. But there are so many! Nevertheless, each detail must be considered. Every scenario requires that we navigate through a mental flow chart. The correct answer lies at the end of every beneficiary maze.

For example, questions that we must definitively ask include:

1. When did the original IRA owner die? This is the foundational question for every case. If the answer is 2019 or earlier, then the “old rules” apply. The SECURE Act does not apply to deaths prior to 2020. So, we literally have two sets of rules to maintain within our mental filing cabinet. The answer to Question #1 dictates which filing drawer of information we access.

2. How old was the original owner when he died/RBD? After identifying when the IRA owner died (assume it was after the SECURE Act), we must know how old the person was at death. Did he die before or after the required beginning date (RBD)? It is imperative to know if required minimum distributions (RMDs) were started by the deceased IRA owner.

3. Is this a Roth or traditional IRA? This question is often overlooked. The payout rules are slightly different for Roth and traditional IRAs. Since RMDs do not apply to Roth IRA owners while they are alive, Roth IRA owners are always deemed to have died before the RBD. (As such, Question #2 is irrelevant for Roth IRAs.)

4. Who/what type of beneficiary is listed (NDB, EDB or NEDB)? This is the biggie. Questions #1 – 3 narrow the scope of each beneficiary situation. Question #4 about the type of beneficiary nails down the applicable payout.

• If the beneficiary is a Non-Designated Beneficiary (NDB, or what I like to call a “non-person”), then we have either the 5-year rule or the “ghost rule” depending on the age of the deceased (Question #2).
• If the beneficiary is a Non-Eligible Designated Beneficiary (NEDB), then we have the 10-year rule. Whether annual RMDs apply in years 1 – 9 of the 10-year rule is also dictated by Question #2 above. If RMDs were started by the deceased IRA owner, then they must continue within the 10-year period.
• If the beneficiary is an Eligible Designated Beneficiary (EDB), then we have a full stretch RMD situation. RMDs based on the single life expectancy of the beneficiary must begin in the year after the year of death.

These four questions will lead us nearly to the end of the “beneficiary payout mental flowchart.” However, there are always minor tweaks. For example, if death is before the RBD (Q2), then an EDB can choose between the 10-year rule or a full lifetime stretch. Also, don’t forget to ask if we are talking about an inherited IRA that was already passed to the first beneficiary. If such is the case, then we must open our mental file cabinet drawer containing the “Successor Beneficiary Rules.” Without knowing ALL the variables, it is impossible to answer a beneficiary payout question accurately. Each and every situation requires a meticulous navigation of what is nothing more than an “if this, then that” flow chart. The proper answer does exist at the end.

https://irahelp.com/slottreport/so-many-ira-beneficiary-variables/

By Andy Ives, CFP®, AIF®
IRA Analyst

QUESTION:

Hello Ed Slott Team,

We have a client with an IRA who wants to do a qualified charitable distribution (QCD) to a charity. The charity also has an account with the same custodian of the IRA and has asked that the client simply journal assets from her IRA directly to the charity’s account. Logistically, this can be done. Two questions on the topic: 1.) Is it OK to journal assets directly in this manner and still have it count as a QCD? 2.) Do QCDs need to be done in cash, or can they be done in positions?

Dustin

ANSWER:

Dustin,

If the custodian is willing to do so, then yes, they can journal the assets from the IRA to the charity’s account. As long as the custodian reports the transaction as a distribution from the IRA, then all will be well. As for question #2, QCDs do not have to be in the form of cash. If a charity is willing to accept, for example, shares of stock, then shares of stock delivered directly to the charity can qualify as a valid QCD.

QUESTION:

I inherited an IRA from my mother in 2015. I misunderstood that it was an IRA and have not been taking required minimum distributions (RMDs). In his most recent book, Ed Slott mentions that the IRS frequently waives the missed RMD penalty. Do I have to file Form 5329 for each of the years I missed taking the RMD (back to 2015)? Should I pay the penalty, or try to get it waived?

Thanks,

Leslie

ANSWER:

Leslie,

The IRS has shown that it is agreeable to waiving the 25% (previously 50%) missed RMD penalty for good cause. There is a process for requesting a waiver: 1.) Take all the past missed RMDs. 2.) Complete a Form 5329 for each year with a missed RMD. (You may need the help of a tax professional.) 3.) Submit the forms to the IRS along with a brief letter explaining what happened, that the oversight has been corrected (i.e., missed RMDs have been taken), and you have taken steps to make sure it won’t happen again. Finally, do not pay the penalty. If the IRS declines your waiver request, it will be in touch. Otherwise, you can assume your waiver request has been granted.

https://irahelp.com/slottreport/qualified-charitable-distributions-and-inherited-iras-todays-slott-report-mailbag/

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/