Market Review and Outlook

By Ian Berger, JD
IRA Analyst

Question:

Our client is 75 years old. He just retired on January 1, 2025. The company has recognized his retirement date as being January 1, 2025.

When must he take his first required minimum distribution (RMD)?

Rick

Answer:

Hi Rick,

If the client actually worked on January 1, 2025, then his first RMD year is 2025. The RMD for the first RMD year can be delayed until April 1 of the next year. So, he could delay the 2025 into 2026 – no later than April 1, 2026. But if he did that, he would have two RMDs payable in 2026, one for 2025 and the other for 2026.

It gets tricky if your client did not work on January 1, 2025 (and his last actual work day was in 2024). There is no IRS guidance on this situation. But the IRS could say that he actually retired (i.e., worked his last day) in 2024 even though the company is showing January 1, 2025, as his retirement date. If so, his first RMD was for 2024 and that RMD was due by April 1, 2025. If he has not taken the 2024 RMD, he would have to take it ASAP and file for a penalty waiver using Form 5329.

Question:

If I made a prior year Roth IRA contribution for 2024 in spring of 2025, when does the 5-year rule for holding that IRA begin?

Many thanks.

Phil

Answer:

Hi Phil,

The 5-year holding period for determining whether the distribution of earnings is taxable begins as of the first day of the year for which a contribution (or conversion) was made to any Roth IRA. The contribution you made in the spring of 2025 was for 2024. So, the 5-year period began on January 1, 2024.

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/first-rmd-year-and-roth-ira-5-year-period-todays-slott-report-mailbag/

By Ian Berger, JD
IRA Analyst

Many retirement plans base employer contributions on employee compensation. For many years, Congress has limited the compensation that can be taken into account for those contributions. Fortunately, this dollar limit only applies to very highly paid employees.

The compensation limit increases most years based on inflation. For 2024, it was $345,000, and it went up to $350,000 for 2025. If you’re fortunate enough to be affected by the limit, it doesn’t mean you can’t receive an employer contribution. It just means that the contribution can only be made on your pay up to the dollar limit for the year.

One type of employer contribution often affected by the compensation limit is 401(k) matching contributions.

Example 1: Mark, age 52, is CEO of FB Company and earns $1.0 million dollars in 2025. The company’s 401(k) matches 50% of each employee’s elective deferrals, up to 6% of pay (a typical formula). For 2025, Mark defers the maximum $31,000 ($23,500 + $7,500 catch-up). The plan can only recognize $350,000 of Mark’s compensation in making the match. So, Mark’s matching compensation is limited to $10,500 [50% x (6% x $350,000)]. If all of his pay could be recognized, his match would be $30,000.

(Don’t feel too sorry for Mark. Many companies have non-qualified deferred compensation plans that allow higher paid employees to defer on their pay without being capped by the annual elective deferral limit.)

The compensation limit also comes into play when a 401(k) employer makes an across-the-board contribution (sometimes called a “profit sharing contribution”) to all employees, whether they defer or not.

Example 2: FB decides to make a flat 4% contribution to the 401(k) plan — instead of a match — for 2025. Mark’s contribution will be limited to $14,000 (4% x $350,000).

SEP IRAs are also subject to the compensation limit. The 2025 maximum SEP contribution is capped at 25% of up to $350,000 of pay, but in no event more than $70,000. SIMPLE IRAs may also be affected. A SIMPLE IRA sponsor can make either a matching contribution or an across-the-board contribution. Oddly, the compensation limit must be applied if an across-the-board contribution is made but not if a match is made.

Most defined benefit pension plans calculate benefits based on a formula that takes into account pay. For example, the plan might pay an annual benefit at retirement equal to 2% of average annual pay times years of service with the employer. In that case, pay cannot include amounts above the compensation limit for the 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/how-the-compensation-limit-affects-retirement-plan-benefits/

By Sarah Brenner, JD
Director of Retirement Education

The IRS has introduced a new code for the reporting of qualified charitable distributions (QCDs) by IRA custodians on Form 1099-R.

How QCDs Work

QCDs first became available in 2006, and they were made permanent in 2015. The strategy has become increasingly popular among IRA owners who are charitably inclined. With a QCD, IRA owners or beneficiaries who are at least age 70½ make a tax-free donation to charity directly from their IRA. An important benefit of a QCD is that it can be used to satisfy a required minimum distribution (RMD).

The 2025 annual limit is $108,000, and it is indexed for inflation. A one-time QCD of $54,000 can go to a split-interest entity, such as a charitable remainder annuity trust, charitable remainder unitrust or a charitable gift annuity.

QCDs can only be made through a direct transfer of IRA funds to charities that qualify under the tax code. Gifts made to donor-advised funds or private foundations do not qualify. In addition, the client cannot receive anything of value from the charity in exchange for making a QCD, and that must be documented in writing.

New Code Y

Historically, IRA custodians have not been required to report a QCD differently than any other IRA distribution. There has never been any special code on Form 1099-R to identify the QCD. Instead, the QCD was coded like any other IRA distribution, and it was up to the taxpayer to let the IRS know about the QCD on the tax return.

For 2025 QCDs, the IRS appears to have changed its approach. In April 2025, the IRS released draft Instructions for the 2025 Form 1099-R. These draft Instructions introduced a new Code Y for QCDs. While these are only “draft” instructions, the IRS has also released the final version of the actual 2025 Form 1099-R with Code Y included.

Code Y would seem to be welcome news for both IRA owners and their tax preparers to help ensure that the QCD tax break is not missed. However, as before, IRA owners will need to be careful to make sure that their donation satisfies all of the QCD rules. Simply receiving a 1099-R with Code Y from the custodian does not necessarily guarantee that the donation qualifies for tax-free treatment.

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/new-reporting-for-2025-qcds/

By Sarah Brenner, JD
Director of Retirement Education

Question:

Since I retired in 2020, each year I have been converting amounts from my employer plan to my Roth IRA. I will be age 73 in 2026. Can I take my required minimum distribution (RMD) amount and convert that to my Roth IRA?

Thanks,

Thomas

Answer:

Hi Thomas,

Unfortunately, this strategy will not work. You can continue to convert funds from your employer plan to a Roth IRA, but your RMDs cannot be converted. However, you can take the RMD and, once that is satisfied, continue to convert funds from the plan to your Roth IRA.

Question:

I retired from my job at age 53. I still have money in my former employer’s 401(k) plan. Now, I am age 57. I was told that since I separated from service and I am now over age 55 that I can take penalty-free distributions from my 401(k) plan. Can you please help clear this up for me?

Thank you for your help!

Gayle

Answer:

Hi Gayle,

Until you reach age 59½, any distribution that you take from the 401(k) plan would be subject to the 10% early withdrawal penalty unless an exception exists. There is an exception to the penalty for distributions taken when you separate from service in the year you reach age 55 or later. This exception would not work for you because even though you are over age 55 now, you separated from service when you were only age 53. It is the age at separation from service that matters and not the age at the time of the distribution.

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-and-401k-distributions-this-weeks-slott-report-mailbag/

By Andy Ives, CFP®, AIF®
IRA Analyst

Roth IRAs follow strict distribution ordering rules. Contributions come out first, then converted dollars, and then earnings. It does not matter how many Roth IRAs a person has, or if the accounts are held at multiple custodians. The IRS doesn’t care. All the IRS sees is one big Roth IRA bucket, and within that consolidated Roth IRA bucket, there are only three types of dollars: contributions, conversion, and earnings. Any distribution from any Roth IRA follows the ordering rules – contributions first, converted dollars second, earnings last.

Let’s focus on just the EARNINGS within this aggregated bucket of Roth IRA dollars. For the earnings to be tax free (which is the goal of starting a Roth IRA), a person must check two boxes. Box #1: He must own a Roth IRA – any Roth IRA – for 5 years. The 5-year clock starts on January 1 of the year of the first Roth IRA contribution or conversion. Box #2: He must be age 59½ or older (or disabled, purchasing a first home or deceased). Check both boxes, and you are living in a tax-free-earnings world for the rest of your life.

Assume a person is 60 years old, never had a Roth IRA before, and decides to make his first entry into a Roth IRA by doing a $100,000 conversion. When will his earnings be tax free? Answer: In five years. Until he reaches the 5-year mark, he only checks the age 59½ box.

What if this same person does another Roth conversion three years after the first conversion? When will the earnings on that SECOND Roth conversion be tax free? Answer: After only TWO years! Why? Because two years after that second conversion, he will be over age 59½ AND will have owned ANY Roth IRA for 5 years (based on his first conversion). With both boxes checked, the 5-year Roth IRA clock applicable to conversion #2 disappears. Any future Roth IRA contributions or conversions in this person’s life will result in IMMEDIATE tax-free earnings.

Example 1: Tom, age 60, never had a Roth IRA before. Excited by the opportunity to have tax-free earnings, he converts $100,000 from his traditional IRA. Since Tom never owned a Roth IRA, he must wait 5 years before the earnings are tax free. Three years later, when Tom is age 63, he does another Roth conversion. This second conversion has its own 5-year Roth IRA clock to wait out before the earnings are tax free. However, two years later, when Tom is age 65, he has checked both boxes: he is over age 59½ AND he owned a Roth IRA for 5 years. At that point, the 5-year Roth IRA clock applicable to Tom’s second conversion disappears, and ALL his Roth IRA earnings are tax-free. Tom will never have another Roth IRA 5-year clock to worry about. The earnings on any future Roth IRA contribution or conversion will be immediately available tax free.

Example 2: Betty was age 55 when she contributed to her first Roth IRA and started her 5-year clock for tax-free earnings. Three years later (age 58), Betty does a Roth conversion. This conversion has its own 5-year clock. However, two years after that, when Betty is age 60, she will have owned a Roth IRA for 5 years (based on her initial contribution at age 55) AND she will be over age 59½. Both boxes checked. Her conversion clock disappears. All earnings are tax free.

Check both boxes – age 59½ AND own any Roth IRA for 5 years – and all earnings in ALL your Roth IRAs are tax free.

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/check-both-boxes-for-tax-free-roth-ira-earnings/

By Ian Berger, JD
IRA Analyst

The April 23, 2025, Slott Report article, “After-Tax 401(k) Contributions Shouldn’t Be an Afterthought,” discusses how 401(k) after-tax contributions can be moved into Roth accounts through in-plan Roth conversions, the “mega backdoor Roth IRA,” or split rollovers. This article will explain the tax implications of these strategies.

If you have made after-tax contributions to your plan, any earnings on those contributions are taxable when distributed to you. If you have earnings, you can’t just take out the after-tax contributions to avoid paying taxes on a withdrawal. Instead, a pro-rata rule treats part of your distribution as taxable.

Most 401(k)s have a separate account that contains only after-tax contributions (not taxable) and earnings (taxable). If your plan does separate accounting, then only that account is considered in doing the pro-rata calculation. (Neither pre-tax accounts nor Roth accounts within your 401(k) are considered for this calculation.) The portion of each withdrawal taxable to you is the ratio of earnings in the after-tax account to the value of the entire separate account. If you’re not sure whether your plan uses separate accounting, check with the plan administrator or your HR rep.

Example: Mei participates in a 401(k) plan that separately accounts for after-tax contributions and their earnings. She has $100,000 in contributions and $25,000 in earnings in that account. Mei wants to do an in-plan conversion to have $40,000 of that account transferred to her Roth account within the plan. Mei cannot just have all $40,000 come from non-taxable after-tax contributions. Instead, 20% ($25,000/$125,000) of the withdrawal, or $8,000, must come from taxable earnings. The remaining $32,000 comes from after-tax contributions and is tax-free.

By contrast, if Mei’s plan doesn’t have separate accounts, her pre-tax 401(k) accounts (e.g., elective deferrals and employer contributions) must be considered in calculating how much of the $40,000 conversion is taxable. That will require her to pay much higher taxes on the conversion.

The same tax analysis would apply if you are using the mega backdoor Roth IRA strategy to move after-tax contributions to a Roth IRA (instead of to your Roth 401(k) account through an in-plan conversion) while you’re working. Again, if your plan has separate accounting, only that after-tax account comes into play when calculating how much of the Roth IRA conversion is taxable.

You can avoid any immediate taxes on a Roth conversion by doing a split rollover of your after-tax and pre-tax 401(k) accounts. You would roll over your after-tax funds to a Roth IRA and your pre-tax funds (including earnings on after-tax contributions) to a traditional IRA. The after-tax funds would be converted tax-free to a Roth IRA, and any subsequent earnings could be withdrawn from the Roth IRA tax-free down the road. However, this split rollover is not available until age 59½ if you’re still working, and depending on the terms of your plan, may not be available until after you leave employment.

Since these rules are complicated, you should contact a knowledgeable financial advisor to discuss how to handle your after-tax plan contributions.

https://irahelp.com/slottreport/how-plan-after-tax-contributions-are-taxed-when-converted/

By Andy Ives, CFP®, AIF®
IRA Analyst

QUESTION:

My wife and I created a Roth IRA when our two children were young to pay for their college education. Our daughter is finishing her second year of school, and our son will be entering college this fall. We have withdrawn $30,000 so far from our contributions to pay her expenses. The current value of the Roth IRA is over $150,000. Our remaining contributions are around $70,000. I’ve been told that I can only withdraw our contributions without tax or penalty and cannot touch the earnings generated unless I pay the income tax. Is this true, or can we use the entire value for the qualified expense? My wife and I are 55 and 54 years old.

Thank you,

Chip

ANSWER:

Chip,

Roth IRAs follow strict distribution ordering rules. Contributions come out first, then converted dollars (none in your case), followed by earnings. Contributions are always available tax- and penalty-free, regardless of how old you are or how long the Roth IRA has been open. As such, you currently have access to $70,000 free-and-clear. The earnings are a different story. For Roth IRA earnings to be tax free, the Roth IRA must have been open for 5 years AND the Roth IRA owner must be at least age 59½, disabled, purchasing their first home or deceased. Unfortunately, paying for higher education is not a reason for taking tax-free distributions of Roth IRA earnings. Therefore, if you exhaust your contributions and start withdrawing the earnings, you can avoid the 10% under-age 59½ early withdrawal penalty by leveraging the higher education penalty exception. However, the earnings will be taxable.

QUESTION:

A recent Slott Report post states that if you are age 73 or older you will need to take your 2025 required minimum distribution (RMD) from your IRA prior to doing a Roth IRA conversion. However, if you turn age 73 in 2025, don’t you have the option to defer your first RMD to April 1, 2026? If so, then, can’t you do a conversion in 2025 without taking the RMD?

Thank you,

Les

ANSWER:

Les,

It is true that the RMD must be withdrawn before a Roth conversion can be completed. It is also true that the first RMD can be delayed until April 1 of the year after the year a person turns age 73. However, if the first RMD is delayed, it is still the first RMD that is applicable to the year the person turned age 73 (2025 in your case). Since it is the RMD for 2025, delaying it to 2026 does not change the fact that it must be withdrawn before doing a conversion in 2025.

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-iras-and-required-minimum-distributions-todays-slott-report-mailbag/

By Sarah Brenner, JD
Director of Retirement Education

While most distributions from a traditional IRA are taxable, sometimes distributions can include after-tax dollars. These after-tax dollars are known as “basis.” Handling and tracking basis in your traditional IRAs can be challenging, but it is important to get it right. If mistakes are made, double taxation can occur. That is a result no IRA owner wants.

What Is Basis in a Traditional IRA?

Basis in a traditional IRA consists of after-tax dollar contributions. Basis in your IRA can come from two sources:

• Nondeductible tax-year IRA contributions (including those that are done as part of the backdoor Roth IRA conversion strategy).
• After-tax funds that are rolled over from a plan like a 401(k). (This does not include funds from a Roth plan account, which cannot be rolled over to a traditional IRA.)

Earnings on basis amounts are tax deferred, not tax free. When earnings are distributed, they are taxable as ordinary income. While basis avoids the 10% early distribution penalty, earnings on these after-tax dollars can be subject to the 10% early distribution penalty, if applicable.

Basis carries over to inherited IRAs. Most beneficiaries, and even their tax preparers, aren’t aware of this issue. If you inherit an IRA, you need to determine whether basis exists. Failure to adequately investigate will cause you to overpay taxes on distributions from the inherited IRA.

IRAs Are Different When It Comes to Basis

Basis in your IRA is different from basis in your investment account. In an investment account, basis is the amount paid for the asset. Growth on that investment is taxed as long-term or short-term capital gain. At the death of the owner, a beneficiary gets a step-up in basis to the current market value. There is never a step-up in basis in any retirement account.

Form 8606

Someone, somewhere, has to be tracking the basis in IRA accounts. Did you think it was the IRA or custodian? You would be wrong. The “I” in IRA stands for “individual.” The individual is responsible for tracking their own basis.

You can track your basis using Form 8606. This form is filed with your tax return each year that you make an after-tax contribution to your traditional IRA, and each year that you take a distribution from your IRA (if the IRA contains basis).

Filing Form 8606 to track your basis is important. No one wants to pay taxes on funds that have already been taxed!

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/basis-in-your-traditional-ira/

By Andy Ives, CFP®, AIF®
IRA Analyst

When a person under the age of 59½ needs access to his IRA dollars, there is a 10% early withdrawal penalty applied to any distribution, unless an exception applies. One of the many 10% penalty exceptions is a 72(t) “series of substantially equal periodic payments.” Due to the possibility of errors over the required duration of such distribution schedules, it is our opinion that establishing a 72(t) should be the last resort. However, sometimes life gets in the way and a person has no other options.

A 72(t) payment plan must continue for five years or until age 59½, whichever comes later. A person leveraging a 72(t) cannot simply choose whatever amount he wants to take. A calculation must be made to determine the allowable distribution amount. The calculation factors in items like the balance in the account, the person’s age and a particular interest rate. Three distribution “methods” have been approved by the IRS: required minimum distribution (RMD), amortization, and annuitization. Usually, the same distribution method must be maintained during the entire payment period. The goal is to use the method that produces the largest 72(t) payments with the smallest IRA balance. This typically results in selecting either the amortization or annuitization method, because the RMD method usually produces a smaller payment.

But what if a market downturn caused the balance of the IRA to severely decline, resulting in the annual 72(t) payments becoming a much larger percentage of the IRA balance? There is relief. IRS Revenue Ruling 2002-62 permits a one-time switch from either the amortization or annuitization methods to the RMD method. This may be appropriate in 72(t) situations where the IRAs has shrunk due to a stock market downturn.

Note that if the switch is made to the RMD method, it is permanent until the end of the original 72(t) payment period. Any other changes would be considered a modification and result in retroactive penalties. Also, be aware that, while 72(t) payments cannot be converted to a Roth IRA, the entire IRA from which the 72(t) payments are coming CAN be converted to a Roth IRA. If the IRA has lost substantial value, converting the account during a market downturn could be a wise tax planning decision. Just be sure to continue with the same payment schedule.

Example: David, age 58, has been consistently taking 72(t) withdrawals from his IRA for three years under the amortization method. With a recent market downturn, his investments have lost considerable value. His required 72(t) payments are now eating up a much higher percentage of his account. To reduce the draw on his IRA, David elects to switch to the RMD method to calculate the remainder of his 72(t) payments. David must still adhere to the original 5-year payment period and can make no other modifications during that time.

For anyone considering a 72(t) series of substantially equal periodic payments, please be hyper careful. The same holds true for anyone with an existing 72(t) looking to make the one-time switch outlined above. One false step and years of retroactive 10% penalties could come due.

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/72t-switching-methods-in-a-market-downturn/

By Ian Berger, JD
IRA Analyst

Question:

At age 71, I’m not yet subject to required minimum distributions (RMDs) from my IRA or workplace retirement accounts.  However, I am required to take annual RMDs from a pre-2020 inherited IRA and a pre-2020 inherited Roth IRA.

Am I required to take the RMDs from these inherited accounts prior to doing a Roth conversion from my own IRA?  Does that change in the year in which I turn age 73?

Answer:

No. You are not required to take RMDs from your inherited accounts before doing a Roth conversion from your own IRA. That will not change starting in the year you turn age 73. But before doing a Roth conversion in that year (or in a subsequent year), you will need to first take the RMD from your own IRA.

Question:

I am 69 years old and plan to retire soon. I have an old Keogh Profit-Sharing Plan that I want to start converting into a Roth IRA.

I’m getting conflicting answers on how this can be done properly. One IRA custodian tells me that I must convert it first into a traditional IRA and then convert it into a Roth. Another IRA custodian tells me that I can convert it directly into a Roth. Both options require me to pay full income taxes on the amount being transferred.

Can you give me some guidance on what you think is the right way to do this?

Thanks,

Mike

Answer:

The first custodian gave you bad advice. For many years, the tax law has allowed direct conversions of retirement plan distributions to a Roth IRA. So, there is no need to first roll over your Keogh plan funds to a traditional IRA before doing the conversion.

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-calculation-and-direct-roth-conversions-todays-slott-report-mailbag/

By Sarah Brenner, JD
Director of Retirement Education

With the popularity of Roth 401(k) contributions, after-tax (non-Roth) employee contributions have gotten short shrift. But, if your plan offers them, after-tax contributions are worth considering. They can significantly boost your retirement savings and can sometimes be funneled into Roth accounts while you’re still working.

After-tax contributions are contributions you make from already-taxed salary. Unlike earnings on Roth 401(k) contributions, earnings on after-tax contributions are always taxable. 401(k) and 403(b) plans are allowed to offer after-tax contributions, but many do not.

One reason your plan may not offer after-tax contributions is because of IRS nondiscrimination rules. Those rules limit the amount of after-tax contributions that a high-paid employee can make, based on the amount that low-paid employees make. Since high-paid employees are the ones most likely interested in making after-tax contributions, the nondiscrimination test is often difficult to pass.

However, after-tax contributions always work for solo 401(k) plans because those plans aren’t subject to nondiscrimination rules.

If your plan offers after-tax contributions, you can potentially put away large amounts. You are limited in the amount of elective deferrals (pre-tax and Roth) you can make in any calendar year (for 2025, $23,500; $31,000 if age 50 or older; and $34,750 if ages 60-63). Importantly, after-tax contributions do not count against this limit. Those contributions, along with elective deferrals and employer contributions (such as matches), do count against another annual dollar limit. But that dollar limit is much higher – for 2025, $70,000, and even more if you’re older. So, even if you’ve maxed out on pre-tax and Roth contributions and have received an employer contribution, you’ll likely still have enough room to make substantial after-tax contributions.

As mentioned earlier, the downside to after-tax non-Roth contributions is that earnings are always taxable. However, your plan may allow you to move your after-tax funds into a Roth account before you accumulate considerable earnings. This can be done through either an in-plan Roth conversion or the “mega backdoor” Roth option.

An in-plan Roth conversion allows you to convert your after-tax dollars (and any other non-Roth dollars) into the 401(k) plan’s Roth account. You’ll pay taxes on the earnings in the year of the conversion, but the Roth account can later be withdrawn tax-free or rolled over to a Roth IRA. The mega backdoor Roth strategy allows you to move after-tax 401(k) funds directly from the plan into a Roth IRA. Once again, you’ll pay taxes on any earnings, but withdrawals from the Roth IRA down the road can be tax-free.

If you still have after-tax contributions in the 401(k) when you leave employment, you can do a split tax-free rollover. This allows you to roll over the after-tax contributions themselves (and any Roth 401(k) funds) to a Roth IRA, while rolling over pre-tax dollars, including earnings on after-tax dollars, to a traditional 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/after-tax-401k-contributions-shouldnt-be-an-afterthought/

By Sarah Brenner, JD
Director of Retirement Education

The April 15 tax-filing deadline has come and gone. However, for some 2024 retirement account planning strategies, it’s not too late! There is still time beyond the April 15 deadline. Here are three retirement account moves for the 2024 tax year that are still available to make in 2025.

1. Correct a 2024 IRA Contribution

For IRA owners who are now discovering they have an excess IRA contribution for a 2024 IRA, there is still time to correct the contribution and avoid a 6% excess contribution penalty. This can be done by withdrawing or recharacterizing the 2024 contribution, plus net income (or loss) attributable, by October 15, 2025.

October 15 is also the deadline to remove or recharacterize 2024 IRA contributions that are not actually excess contributions but are, instead, simply unwanted. After October 15, 2025, this flexibility for 2024 IRA contributions goes away.

The October 15, 2025, deadline for correcting 2024 contributions applies to anyone who timely files their 2024 tax return. This is true even if you do not have an extension past the standard April 15 deadline.

2. Make a 2024 SEP Contribution

There is also additional time for those looking to establish and contribute to a SEP IRA plan for 2024. While contributions to a traditional or Roth IRA must be made by the tax-filing deadline, a SEP IRA plan can be established and funded at any time up to the business’s tax-filing deadline, including extensions.

The SEP limit for 2024 is 25% of up to $345,000 of compensation, limited to a maximum annual contribution of $69,000. (For 2025, these numbers increase to $350,000 of compensation, limited to a maximum contribution of $70,000.)

3. Make a 2024 Employer Contribution to a Plan

If a business has employees, any employee contributions to a retirement plan for 2024 must have already been made. Employee salary deferrals have strict deadlines that require deferrals to be deposited into the plan throughout the year soon after the contribution is withheld.

However, employer contributions for 2024 to retirement accounts have a later deadline. Employer contributions can still be made until the business’s tax-filing deadline, including extensions. This rule applies to employer contributions to both qualified plans, such as 401(k) plans, and SIMPLE IRA plans.

https://irahelp.com/slottreport/3-retirement-account-moves-you-can-still-do-for-2024/

By Andy Ives, CFP®, AIF®
IRA Analyst

Question:

Are rollovers done by a spouse beneficiary subject to the once-per-year IRA rollover rule? The IRA funds were never distributed to me. They were directly transferred from my deceased husband’s IRA to my own IRA. Everything was done electronically at the same firm. I’m being told that the second transfer is taxable.

Camilla

Answer:

Hi Camilla,

The once-per-year rollover rule applies to 60-day rollovers between IRAs. It does apply to spouse beneficiaries; however, it is not a concern in your situation. You did not do any 60-day rollovers. Instead, you moved the funds from the inherited IRA to your own IRA by doing direct transfers. Direct transfers are not subject to the once-per-year rollover rule, so you do not have a problem.

Question:

I have a traditional IRA and four SEP IRAs. Can I calculate my total 2025 RMD and take that total out of one SEP IRA?

Dave

Answer:

Hi Dave,

Good news! Aggregation of required minimum distributions (RMDs) is permitted between traditional and SEP IRAs. You can take the total of all your 2025 RMDs from the traditional IRA or from any combination of the SEP IRAs.

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/once-per-year-rollover-rule-and-rmd-aggregation-todays-slott-report-mailbag/

By Andy Ives, CFP®, AIF®
IRA Analyst

The recent market ride has been nuts. It is certainly no fun for anyone who owns stock or stock funds. Many of us are experiencing the same sensation in our gut as when a roller coaster click, click, clicks to its apex and then plummets over the edge. (That’s why I don’t ride roller coasters anymore.) Wild swings in the market result in sleepless nights for many. But for those with a long-term view, there is a potential silver lining in this storm cloud.

Market dips can create positive opportunities with the net unrealized appreciation (NUA) tax strategy…but can also lead stock owners down the wrong path. When executed properly, the NUA strategy allows a person to pay ordinary income tax on the cost basis of company stock from his workplace retirement plan, and long-term capital gains on the appreciation. This could result in tens of thousands of dollars in tax savings. Forward-looking employees could view a dip in the price of the company stock in their 401(k) as an opportunity to “reset their basis.”

Example: Kyle, age 45, participates in the 401(k) offered by his employer, ABC Company. Within his 401(k) account, Kyle owns shares of ABC stock and has a current average cost basis of $40. When the market was at its peak, ABC stock reached $70 per share. However, with the recent downturn, ABC stock has slumped to $30 per share. Kyle sells all his ABC stock within his 401(k) and promptly buys back the shares at $30, thereby “resetting” his cost basis. (The “wash-sale rule” does not apply in this scenario.) If ABC stock rebounds over the next few years, Kyle has set himself up for a more favorable NUA distribution in the future.

Unfortunately, market volatility can also lead to panicked decisions. Others within ABC Company (from the example above) may not have been so level-headed as Kyle. The adage of “buy low, sell high” often gets reversed. A mistake would be to liquidate all 401(k) company stock shares while the markets are tumbling and to sit on the sidelines until conditions improve. But timing the market is impossible. Missing the rebound “bumps” on the way back up could significantly minimize returns (e.g., the Dow Jones spiked 2,963 points on April 9).

Additionally, selling out and buying back company stock at a higher share price could ruin what was previously a solid NUA opportunity.

Example: Nervous Nellie also works at ABC Company and has company stock in her 401(k). Nervous Nellie is a long-time employee with a cost basis of $20 per share. When the ABC stock price dipped to $30, Nellie could not take the volatility anymore. She dumped all her shares and stayed away until the news was more rosy. Ultimately, when ABC stock rebounded and settled in at $60 per share, Nervous Nellie reallocated her 401(k) and bought back into ABC. In her panic, Nervous Nellie reset her cost basis HIGHER, from $20 per share to $60. If an NUA transaction is in her future, Nellie’s actions will prove detrimental.

Before haphazardly panic-selling company stock, be sure to consult with a knowledgeable financial professional to assess your situation. Resetting NUA basis can go both ways.

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/nua-resetting-cost-basis/

By Ian Berger, JD
IRA Analyst

In the 2022 SECURE 2.0 legislation, Congress gave the IRS two years – until December 29, 2024 – to come up with rules allowing IRA owners to fix certain mistakes through self-correction. Alas, December 29, 2024 has now come and gone, and we’re still waiting for those rules.

Here’s the background: For a number of years, the IRS has had a program in place – the Employee Plans Compliance Resolution System (EPCRS) – that allows employers to correct errors made by their retirement plans. SECURE 2.0 legislation loosened EPCRS to make self-correction for plans even more widely available.

Importantly for IRAs, SECURE 2.0 also expanded EPCRS to permit self-correction of IRA mistakes. Self-correction allows correcting those errors without paying any penalty or even notifying the IRS, as long as correction is made in accordance with IRS rules.

This was exciting news! It is true that IRA owners already have the ability to fix certain IRA mistakes. For example, since 2016, the IRS has permitted “self-certification” to remedy rollovers made after the 60-day deadline in certain circumstances. In addition, the 25% penalty for missed required minimum distributions (RMDs) can be avoided if the IRA owner properly requests a waiver of the penalty.Finally, an excess IRA contribution can be corrected without penaltyif the contribution, plus attributable earnings or losses, is returned by October 15 of the following year.

But there are several other commonplace errors that currently cannot be corrected and would be prime candidates for EPCRS correction. These include the once-per-year rollover rule, nonspouse beneficiary 60-day rollovers, and modifications of 72(t) payment schedules.

In fact, in SECURE 2.0, Congress said that any “eligible inadvertent failure” related to an IRA (except for “egregious” errors) could be self-corrected. Congress even listed two specific examples of “eligible inadvertent failures” for which the IRS should allow self-correction. The first would allow a waiver of the 25% penalty on missed RMDs. As discussed above, the IRS already freely excuses this penalty if a waiver request is made, so it’s not clear how self-correction would fit in with that existing policy. The second would allow a nonspouse IRA beneficiary to return an inherited IRA that had been rolled over when, because of an “inadvertent error” by a service provider, the beneficiary believed a tax-free 60-day rollover was possible. Again, though, it’s not clear how far this relief will go.

All we can do is take comfort in the words of the late, great, Tom Petty: “The waiting is the hardest part.”

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/still-waiting-for-irs-guidance-on-ira-self-correction-program/

By Andy Ives, CFP®, AIF®
IRA Analyst

QUESTION:

A 401(k) plan participant over age 73 wants to roll over his account to a new IRA. I understand that he must take a required minimum distribution (RMD) before the rollover. Is an additional RMD required in the same year from the IRA?

ANSWER:

If this person has no other IRAs besides the new one receiving the 401(k) funds, then no additional RMD needs to be taken from the IRA for this year. Reason being is that the IRA receiving the 401(k) rollover funds had a $0 balance on December 31, 2024. With no balance for the previous year’s end, there is no 2025 RMD on the IRA to calculate.

QUESTION:

I am turning age 73 this year and will need to take my RMD. I have three different investment firms for my IRAs, SEP IRA plan and a 457(b) plan. My question is: Do I have to take my required minimum distribution (RMD) from each plan/firm or can I take the full amount from any one of the accounts?

Thank you,

Dean

ANSWER:

Dean,

Your question is all about the RMD aggregation rules. Some accounts can be aggregated for RMD purposes, and some cannot. In your specific scenario, the IRAs and SEP IRA account RMDs can be aggregated. While the RMD must be calculated individually for each IRA and the SEP account, all or any portion of the aggregated total can be taken from any combination of the IRAs and SEP. The 457(b) RMD, on the other hand, cannot be aggregated with any other account. That RMD must be taken from the 457(b) plan.

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/rollovers-and-required-minimum-distributions-todays-slott-report-mailbag/

By Sarah Brenner, JD
Director of Retirement Education

Recent turmoil in the markets has hit many retirement savers hard as they see their IRA and 401(k) balances rapidly shrinking. For many, the age-old advice to stay the course for the long term and not cash out too soon applies, but for those who are age 73 or older, the rules requiring required minimum distributions (RMDs) present a hurdle.

2025 RMDs

Under current tax rules, IRA owners and many participants in employer plans must start taking RMDs once they reach the year in which they turn age 73. (The first RMD can be delayed until the following April 1, but then you would have two RMDs due in the next year.) Some plan participants can also delay RMDs if they are still working.

To calculate your 2025 RMD, you divide the December 31, 2024, balance of your account by the factor that corresponds with your age on the IRS Uniform Lifetime Table. Here is the issue: Due to recent market losses, many have seen their account balances decrease sharply from where they were at the end of 2024. This means taking an RMD calculated on a much bigger balance from a significantly smaller account.

RMD Waivers

Will retirement savings get any relief from this 2025 RMD hit?

In the past, when the markets have experienced very severe declines, Congress has stepped in and waived RMDs for the year. We saw this happen in 2009 during the Great Recession and then again in 2020 due to the global pandemic. As of right now, it is too early to tell if similar relief will be available in 2025, but the fact that this happened before is worth noting.

In these times of market volatility, retirement savers may want to delay 2025 RMDs until later in the year. Retirement account balances may have recovered by then, or Congress may act and grant some relief, as they have done before.

Stay Tuned

At the Slott Report, we have heard from many IRA owners and plan participants who are concerned about their 2025 RMDs in these times of market losses. We will be following any developments on this issue closely. Stay tuned for updates!

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/will-market-volatility-mean-rmd-waivers-for-2025/

By Andy Ives, CFP®, AIF®
IRA Analyst

As a follow up to the March 26 Slott Report entry that included a full list of the 10% early withdrawal penalty exceptions (“10% Penalty Exceptions: IRAs and Plans”), here we get a little deeper into the weeds on some of the nuances of certain exceptions. As mentioned in the March 26 article, some exceptions apply to plans only, some to IRAs only, and some to both. Taking that concept a bit further, some exceptions apply to the account owner only, and some to certain extended family members of the account owner.

Not only must a person know which exceptions apply to which accounts, but they must also recognize who can leverage these exceptions. We have seen countless situations where a misunderstanding has led to the exception being denied. For example, in a recent court case, an IRA owner under the age of 59½ took a distribution from his account and claimed the disability exception. He used the dollars to cover expenses for his disabled wife. And therein lies the problem. The disability exception is applicable to the IRA owner only. Even though the distributed money was used to cover the legitimate costs for taking care of a disabled person (the wife), the IRA owner (husband) was not disabled. To qualify for the exception, the withdrawal needed to come from the disabled wife’s account. The 10% penalty exception was denied.

Like the disability exception, other exceptions available to the account owner ONLY include birth or adoption, terminal illness, active reservists, age 55, and the 72(t) substantially equal periodic payment exception. Meaning, the account owner himself must be the one who is terminally ill or adopting a child. Other exceptions are applicable to the account owner AND certain extended family members. These include the following:

• Higher Education (IRAs only). The 10% penalty on the IRA distribution can be avoided if the higher education costs are for the IRA account owner, his spouse, child, or grandchild of either the owner or spouse. Nephews, cousins and siblings of the IRA owner do not qualify.

• First-Time Homebuyer (IRAs only). For the purchase of a home belonging to the IRA owner, his spouse, any child, grandchild, or ancestor of the IRA owner or his spouse. Again, people like nephews, cousins and siblings of the IRA owner do not qualify.

• Medical Expenses over 7.5% of adjusted gross income (Plans and IRAs). This exception is used for expenses incurred by the account owner, spouse or dependent. Just be careful with timing. The medical expenses must be paid in the same year as the distribution.

• Domestic Abuse (Plans and IRAs). The IRA owner himself does not need to be the victim to qualify for this exception. The abuse could be inflicted on the account owner’s child or another family member living in the household.

• Financial Emergencies (Plans and IRAs). This exception is for distributions necessary to meet “unforeseeable or immediate financial needs relating to personal or family emergencies.” Hence, it is available for a family member’s emergency, not just those of the account owner.

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/who-can-use-a-10-penalty-exception/

Question:

My wife turns 73 years old in August 2025. My understanding is that she has until April 1, 2026, to take her first required minimum distribution (RMD), in which case she would wind up taking two RMDs in 2026.

The RMD for 2025 is approximately $24,000. My question is: Can she can take a partial RMD of, say, $20,000 in 2025 and the $4,000 balance in 2026? Or, if she takes anything out of the IRA in 2025, does it have to be the full amount?

Thank you.

Les

Answer:

Hi Les,

Your wife can split the 2025 RMD between 2025 and 2026, as long as the total RMD is taken by April 1, 2026.

Question:

I am turning age 73 in 2025. I am still working, so I know I don’t need to start taking RMDs on my 401(k) because my plan has the still-working provision. All of my IRAs have been converted to Roth IRAs. I do a backdoor Roth each year on January 1. My question is: Do I need to take an RMD on the $8,000 contribution before I convert it to a Roth IRA?

Clinton

Answer:

Hi Clinton,

No, an RMD does not need to be taken. The reason is that lifetime RMDs are only required for traditional IRAs – not Roth IRAs. So, the RMD is based on the prior-year 12/31 account balance of your traditional IRAs divided by your life expectancy under the IRS Uniform Lifetime Table. If all of your traditional IRAs have been converted, then, for RMD purposes, you will have a zero account balance as of 12/31 of the prior 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/deferral-of-first-rmd-and-rmds-for-roth-iras-todays-slott-report-mailbag/

By Ian Berger, JD
IRA Analyst

When you file for bankruptcy, one thing you usually don’t have to worry about is protecting your IRA funds from your bankruptcy creditors.

That’s because, in just about every case, all of your IRA (and Roth IRA) monies are off limits. Under the federal bankruptcy law, IRA assets up to a certain dollar limit cannot be reached by creditors. That dollar limit is indexed every three years based on the cost-of-living. On April 1, the dollar limit increased from $1,512,350 to $1,711,975, effective through March 31, 2028.

That limit is especially generous because it doesn’t take into account rollovers from employer plans like 401(k) or SEP and SIMPLE IRA plans. (Those rolled-over dollars are always fully protected.) So, only IRA contributions themselves, and earnings on those contributions, are taken into account. Since IRAs did not become available until 1975, it would be a rare case for someone to have amassed over $1.7 million from IRA contributions and earnings alone.

Of course, the $5 billion Roth IRA owned by Peter Thiel, a cofounder of PayPal, is a notorious exception to that rule. If you’re also an IRA owner lucky enough to have contributory IRAs and earnings worth more than the federal dollar limit, you may have two other ways to shield your entire IRA portfolio in bankruptcy.

First, you may live in a state that has its own state bankruptcy law protecting all of your IRA funds in bankruptcy – no matter how large (in other words, without the $1.7 cap).

You may also have protection if you live in certain states with an anti-garnishment law. That’s a law that says your IRAs can’t be reached to pay off a non-bankruptcy legal judgment (for example, when you must pay lawsuit damages). In the 2022 case of Hoffman v. Signature Bank of Georgia, No. 20-12823 (11th Cir. 2022), January 24, 2022, a Georgia resident filed for bankruptcy. Georgia is a state that completely protects IRAs from garnishment. The Eleventh Circuit Court of Appeals ruled that the existence of the Georgia anti-garnishment law, a non-bankruptcy law, fully protects a resident’s IRA dollars in bankruptcy. (Don’t ask me to explain; it’s complicated.) That would be the case even if the IRA assets exceed the $1.7 million cap.

A couple of points about the Hoffman decision: First, it technically only affects you if you live in the Eleventh Circuit – Alabama, Florida and Georgia. Second, it would never apply if you live in a state that doesn’t have an anti-garnishment law like Georgia’s law.

But, remember, even if your state doesn’t have its own laws to protect your IRAs, you can always rely on the federal protection up to $1,711,975. For most people, that should be more than enough.

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/higher-ira-federal-bankruptcy-ira-protection-limit-became-effective-on-april-1/

By Sarah Brenner, JD
Director of Retirement Education

There is still time! You can still make a prior-year (2024) IRA or Roth IRA contribution up to the tax filing due date, April 15, 2025. For most people, there is no extension beyond that date, regardless of whether a tax return extension is filed.

While April 15 is the deadline to contribute to an IRA for most individuals for the prior year, if you live in a federally declared disaster area you may be given additional time by the IRS to complete certain tax-related acts, such as making an IRA contribution. This year, those taxpayers impacted by the California wildfires have until October 15, 2025, to make a 2024 prior-year IRA contribution. An up-to-date list of disaster victims entitled to tax relief can be found on the IRS’s website: irs.gov/newsroom/tax-relief-in-disaster-situations.

Contribution Limit

The maximum contribution is $7,000. However, if you are age 50 or older by December 31, 2024, you can contribute an additional $1,000. This total amount is applied in aggregate across all of your traditional and Roth IRAs. Note that IRA contributions have no bearing on how much you can contribute to a workplace plan such as a SEP IRA, SIMPLE IRA or a 401(k).

Compensation

IRA and Roth IRA contributions are only permitted when you have compensation. Typically, whether or not a person has “compensation” is a relatively straightforward determination. For most individuals, compensation comes from employment, either as an employee or from self-employment income. Confirmation of “compensation” can be found in Box 1 of your W-2 form. Any amount listed here (minus any amount listed in box 11) qualifies as “compensation.”

As is often the case with IRAs, special rules exist for spouses when it comes to compensation. A spouse with little or no compensation can make an IRA contribution based on the other spouse’s compensation. If the higher-compensated spouse had enough eligible income, both spouses can make the maximum IRA contribution. Note that you must file a joint tax return for the year to qualify for a spousal contribution.

Deductibility

A traditional IRA contribution is not always deductible. (Roth IRA contributions are never deductible.) One factor for determining IRA deductibility is if you are an “active participant” (i.e., “covered”) in a retirement plan at work. This can be confirmed by checking Box 13 on your W-2. If neither you or your spouse have a retirement plan through an employer, then neither of you is an “active participant” and you each can deduct a traditional IRA contribution. It does not matter what your income is. Single filers not participating in an employer plan also qualify for a deductible IRA contribution without regard to their income.

If you are an active participant in an employer plan, you must consider the phase-out ranges for traditional IRA deductibility. As mentioned, while you can always make a traditional IRA contribution, you may not be able to deduct it. For 2024 IRA contributions, the income phase-out ranges for deductibility were $123,000 – $143,000 of modified adjusted gross income (MAGI) for those married/filing joint, and $77,000 – $87,000 for single filers. (In 2025, those numbers move to $126,000 – $146,000 and $79,000 – $89,000, respectively.)

There is another IRA deductibility phase-out range when one spouse participates in an employer plan and the other spouse does not. The participating spouse uses the married/filing joint phase-out ranges just listed. The non-participating spouse is permitted a higher phase-out range of $230,000 – $240,000 for 2024 ($236,000 – $246,000 for 2025).

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/make-your-2024-ira-contribution-by-april-15/

By Andy Ives, CFP®, AIF®
IRA Analyst

Question:

In the article “Why You Should Take Your 2025 RMD Now,” the following caught my eye …

“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.”

I wonder if you can clarify what the phrase, “send funds directly to charity” means? The reason I ask is because doing a QCD on my IRA custodian’s web site produces a check payable to:

Name of the charity
FBO my name
My address

The custodian mails the check to me, and I need to mail it to the charity. The IRA custodian apparently thinks that qualifies as “directly to the charity.”  I’m not sure. What do you think?

Sincerely,
– Jim

Answer:

Hi Jim,

That will work! Sending a check to you will still qualify as a QCD, as long as the check is made payable to the charity and not to you personally. Just be sure that you deliver it to the charity, so it can be processed by them before the December 31 QCD deadline to avoid tax issues.

Question:

I have a question about an inherited Roth IRA. If a person inherits a Roth IRA in 2023, do they have to take required minimum distributions (RMDs) during the 10-year payout period? My spouse’s mother died in 2023 at the age of 95. In 2024 my spouse decided to take an RMD because it was unclear if he needed to. We would prefer to allow the money to compound as long as possible, before taking any distributions.

Thanks,

Mitch

Answer:

Hi Mitch,

Good news! RMDs are not required during the ten-year period for Roth IRA beneficiaries using the 10-year rule. Your spouse does not need to take any distributions from the Roth IRA he inherited from his mother until the end of 2033. He can let the tax-free earnings continue to accumulate in the inherited account until then.

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/qualified-charitable-distributions-and-inherited-iras-todays-slott-report-mailbag-2/

By Andy Ives, CFP®, AIF®
IRA Analyst

If a person under age 59½ takes a withdrawal from his IRA or workplace plan, there is a 10% early withdrawal penalty…unless an exception applies. There are currently 20 exceptions, with a 21st on the way. Here are those exceptions, with some brief commentary.

Exceptions Applicable to BOTH Plans and IRAs (Note: Check to make sure your plan allows in-service withdrawals for any plan-specific exceptions.):

• Death. Withdrawals from inherited accounts are always penalty free.
• Disability. High hurdle. Being “retired on disability” may not qualify.
• 72(t). The program must run for 5 years or until age 59½, whichever is longer. Tread carefully with this exception!
• Medical Expenses (Over 7.5% Adjusted Gross Income). You will need to do some math with this one.
• IRS Levy. If the IRS takes your money, there is no 10% penalty. Awesome.
• Active Reservists. A function of active duty and when the distribution is taken.
• Birth or Adoption. Up to $5,000 per child. Must be the parent of that child to qualify. (Aunts and uncles of the new family member cannot leverage this exception.)
• Terminal Illness. Death is reasonably expected within 7 years. No limit on the amount.
• Federally Declared Disasters. Capped at $22,000. The IRS provides a list of current disaster areas here: Tax relief in disaster situations | Internal Revenue Service.
• Domestic Abuse. An unfortunate reason for the need of a spouse or domestic partner to access retirement funds, up to the lesser of $10,000 or 50% of account
• Emergency Expenses. $1,000 cap, but it might get a person to their next paycheck.

Exceptions Applicable to IRAs Only (Including SEPs and SIMPLEs):

• Higher Education Expenses. Available to the IRA owner and certain family members.
• First Time Homebuyer. Lifetime cap of only $10,000.
• Health Insurance If You Are Unemployed. Pretty straightforward.

Exceptions Applicable to Plans Only (Not Including SEPs or SIMPLEs):

• Age 55. You must separate from service in the year you turn age 55 or older.
• Age 50 or 25 Years of Service for Public Safety Employees. Same as above, except the earlier of age 50 or 25 years of service, and only applicable to certain groups of workers.
• Section 457(b) (Governmental) Plans. Withdrawals are always penalty-free from these plans.
• Divorce (QDRO “Qualified Domestic Relations Order”). A QDRO allows the receiving ex-spouse to have penalty-free access to the funds while they are in the plan.
• Phased Retirement Distributions from Federal Plans. Very complex. Allows full-time employees to work part-time schedules while beginning to draw retirement benefits.
• Pension-Linked Savings Accounts. Limited to $2,500. This is an optional add-on feature for plans like a 401(k).

Exception #21, effective December 29, 2025, is for plans only and applies to premium payments for certain long-term care policies. But we will cross that bridge when we get to it.

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.

By Ian Berger, JD
IRA Analyst

We continue to get lots of questions about the new “super catch-up” contribution for retirement plan and SIMPLE IRA participants who are ages 60-63. Here are answers to your top 12 questions:

1. When does the super catch-up contribution rule become effective?
It became effective for the 2025 calendar year.

2. Is the super catch-up only available for 2025?
No, it will continue for years after 2025.

3. To which plans does it apply?
The super catch-up applies to 401(k), 403(b) and governmental 457(b) plans. It also applies to SIMPLE IRA plans. However, it does not apply to traditional or Roth IRAs.

4. Are those plans required to offer it?
No, the super catch-up is optional for plans to offer.

5. Who is eligible for the super catch-up?
Participants in covered plans who turn age 60, 61, 62 or 63 during the year are eligible for that year.

6. If I turn age 60 during the year, can I contribute the full super catch-up?
Yes, the limit is not pro-rated in the year you turn age 60. So, for example, if you turn age 60 on July 1, 2025, and your plan offers the super catch-up, you can contribute up to the full limit for 2025 – not just ½ of the full limit.

7. If I turn age 64 during the year, am I eligible for the period when I was age 63?
No, you are not eligible. That’s the case even if you don’t turn age 64 until December 31.

8. Why ages 60, 61, 62 and 63?
That’s one question we can’t answer. No one seems to know why Congress settled on those ages.

9. Is the super catch-up in addition to, or instead of, the “regular catch-up” for ages 50 and older?
It’s instead of the age-50 catch-up.

10. What is the 2025 super catch-up limit?
For 401(k), 403(b) and governmental 457(b) plans, the 2025 limit is $11,250. That figure results from multiplying $7,500 (the 2024 regular catch-up limit) by 150%. So, an age 60-63 employee in a plan that allows catch-ups can defer up to a total of $34,750 ($23,500 + $11,250) for 2025.

11. What about SIMPLE IRAs?
You’ll be sorry you asked. The super catch-up contribution is available for SIMPLE IRA employees. The 2025 limit is $5,250. SIMPLE IRA participants age 50 or older (but not ages 60, 61, 62 or 63) are also eligible for the “regular” catch-up. That catch-up is either $3,850 or $3,500 for 2025. It’s $3,850 for plans with 25 fewer employees or plans with more than 25 employees where the company has agreed to make a larger-than-normal employer contribution. (That’s because of a 10% bump-up to the SIMPLE IRA contributions that became effective in 2024.) The 2025 age 50-or-older catch-up is $3,500 for larger plans where the employer hasn’t agreed to make the higher contribution. So, for 2025, there are three SIMPLE IRA catch-up contribution limits.

12. Why are the SIMPLE IRA catch-up rules so un-SIMPLE?
Ask your congressperson.

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/12-super-catch-up-contribution-questions-answered/

By Andy Ives, CFP®, AIF®
IRA Analyst

QUESTION:

I cannot find the indexed number for IRA bankruptcy protection for 2025-2028. It is $1,512,350 currently, but it is scheduled to increase on April 1, 2025. Do you know what it will be?

Mike

ANSWER:

The updated IRA bankruptcy protection number is $1,711,975, effective April 1, 2025. As you mentioned, this level of bankruptcy protection for IRAs will be in effect for the next three years. Note that the $1,711,975 does NOT include former plan dollars rolled into the IRA – like from a 401(k). Former plan dollars remain 100% protected from bankruptcy within the IRA and do not eat into the $1,711,975 cap.

QUESTION:

I inherited my brother’s Roth IRA in 2018 and take required minimum distributions (RMDs).

Under the SECURE Act, does the beneficiary I name on this account continue taking RMDs based on my schedule? If so, do they do so for 10 years and then empty the account in year 10?

Or, do they not have to take any distributions until year 10?

Thank you.

Donna

ANSWER:

Donna,

The beneficiary of your inherited Roth IRA is a successor beneficiary. Since you are already taking RMDs, those annual payments cannot be stopped by the successor. The IRS rules dictate that the successor will “step into your shoes” and continue with your exact same RMD schedule, using your same single life expectancy factor, minus one each year. Additionally, the successor beneficiary must also abide by the added layer of the 10-year rule. So, RMDs must continue in years 1 – 9 for the successor, and the account must be emptied by the end of year 10.

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/bankruptcy-protection-and-inherited-iras-todays-slott-report-mailbag/

By Sarah Brenner, JD
Director of Retirement Education

The arrival of the SECURE Act means the end of the stretch IRA for many beneficiaries. Instead, a 10-year payout rule applies for most IRAs inherited by non-spouse beneficiaries. However, the SECURE Act does allow the stretch to continue for certain select groups of beneficiaries. These beneficiaries are called “eligible designated beneficiaries” (EDBs). EDBs include spouse beneficiaries, minor children of the account owner, as well as disabled and chronically ill individuals.

Not More Than 10-Years Younger

Beyond the above listed groups of EDBs, there is another group of EDBs that may surprise you. This group is often overlooked, and many people are unaware of just how common it can be. A beneficiary who is not more than 10 years younger than the deceased IRA owner (based on their actual birthdates) also qualifies as an EDB. Under this definition, any beneficiary older the account owner would also be an EBD. This group of beneficiaries can include an unexpectedly large number of people. For example, siblings, friends, and unmarried partners, who are often named as beneficiaries, are all frequently close in age.

Example: Eli, age 65, dies in 2025. He has two IRAs. The beneficiary of one IRA is his older brother, Ben, age 77, and the beneficiary of the other IRA is his good friend, Thomas, age 60. Both Ben and Thomas qualify as EDBs because they were not more than 10 years younger than Eli. Therefore, they can both use the stretch IRA. They can take distributions from the IRAs they inherited from Ben using their single life expectancy. They are not required to use the 10-year rule.

Are You An EDB?

If you have inherited an IRA, you should not assume that the 10-year rule applies, even if you are a non-spouse beneficiary. Are you older than the IRA owner was? Or, were you close in age? That can make you an EDB, which changes your options for inherited IRA funds. If you are not more than 10 years younger than the account owner was, you are part of a surprisingly large group of beneficiaries who are still eligible for the stretch, even after the SECURE Act.

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/surprise-you-may-still-be-eligible-for-the-stretch-ira/

By Andy Ives, CFP®, AIF®
IRA Analyst

Here is an all-too-common situation that seems counterintuitive: A participant in a 401(k) retires and must take his required minimum distribution (RMD). This person requests that his entire 401(k) plan balance be directly rolled over to an IRA. The plan follows the participant’s direction, and the entire amount is sent to the IRA.

PROBLEM: No RMD is distributed from the plan prior to the movement of money to the IRA.

QUESTION: Do we have a missed RMD situation?

ANSWER: We do NOT…but all is not well.

The RMD from the plan must be taken prior to the rollover to the IRA. RMDs are not eligible to be rolled over, so it should have been distributed. Oftentimes people think they can roll a 401(k) RMD to their IRA and simply take that plan RMD from the IRA later in the year. Incorrect. This is not permitted.

So, if an RMD cannot be rolled over, then how do we NOT have a missed RMD in the scenario outlined above?

Technically, a direct rollover from a plan to an IRA is just that: a rollover. It is NOT a direct transfer like we see with IRA-to-IRA transactions. Direct transfers between IRAs do not generate any tax reporting. There is no 1099-R or Form 5498 with direct transfers. As such, RMDs can be directly transferred from IRA to IRA. But they cannot be ROLLED over from IRA to IRA.

Plan balances, like in a 401(k), cannot be directly “transferred” to an IRA. The movement of money from plan to IRA is a direct rollover, and rollovers generate tax forms. A 1099-R reports the distribution from the plan, and a 5498 shows the offsetting rollover/redeposit into the IRA.

And therein lies the sneaky answer as to why we don’t have a missed RMD in the scenario above. Technically, the plan paid out the entire balance, including the RMD. The 1099-R will report a full distribution. As such, the RMD was TECHNICALLY paid out by the plan. The problem now is not that the RMD was missed. The problem is that the RMD was rolled over. And what is the result when an RMD is rolled over? We have an excess contribution for the RMD amount in the receiving IRA.

The corrective measure here is NOT to follow the missed RMD correction process. Instead, we follow the excess contribution rules. If timely corrected by the October 15 deadline, the erroneously rolled-over RMD is removed from the IRA along with any earnings (“NIA” – net income attributable) as an excess contribution withdrawal. The earnings are taxable, but there is no penalty and no special tax forms to file. Oh…and no missed RMD.

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-trivia-missed-rmd-or-excess-contribution/

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/