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Many of you who participate in a company retirement plan may have heard that the plan is “qualified” or “tax-qualified.” That sounds reassuring, but what exactly does it mean? In other words, what qualifies a qualified plan to be qualified? (And, while we’re at it, how much wood can a woodchuck chuck …?) The carrot and the stick: The concept of a qualified plan resulted from Congress’s desire to incentivize companies to establish retirement plans. So, Congress enacted certain tax breaks for employers who set up those plans, but required the plans to satisfy a number of rules designed to make sure the plans don’t take advantage of rank-and-file workers. Here are the most important of those rules:

Question: I have read your updates and shared information regarding the SECURE bill that is in the Senate currently. The information discusses the non-spouse beneficiaries of IRAs will need to take distributions over 10 years as a lifetime stretch will not be an option anymore. Do you have any information on existing Inherited IRAs that are already in the stretch phase? My wife inherited an IRA in 2007 and we are stretching it over her lifetime. Does the bill grandfather existing and focus on future inherited IRAs? I realize we will not know the final answer until the bill is passed by both chambers and signed by the President, but wondered if you had any preliminary information.

When driving your car, most of the time you’re going forward. But sometimes, like when you back into a parking spot in anticipation of beating the traffic after a sporting event or concert, you must shift gears to reverse. So it is with rollovers between 401(k) plans (or other employer plans) and IRA’s. Most of the time you’ll be considering a rollover from the 401(k) plan to an IRA. But sometimes it makes sense to consider a “reverse rollover” – from an IRA to a 401(k).

‘Tis the season for bee stings and mosquito bites. Just like those summer irritations, 401(k) plan loans have their own annoying rules that can make them risky transactions. Fortunately, a provision of the 2017 tax reform law applied a little hydrocortisone to help relieve the itch. One advantage that 401(k) plans have over IRA’s is that 401(k)’s (as well as many other employer-sponsored plans) can allow participants to borrow against their accounts. 401(k) plans are not required to allow loans, but most do.

Question: Your advice, articles, publications and books I’ve purchased over the years have been great and most informative. Great job! My question is with regards to NUA – I retired recently (age 66) and had a company 401(k) to which I contributed over the years and will likely not make any withdrawals until required RMD’s. Within the company 401(k) plan I invested in selected bond funds, stock funds, small cap, a value fund, target funds, mid cap funds, international funds and our company stock fund option. (Some of the company stock I purchased and some was a company gift over the years).

Prior to 2002, a default option for paying out required minimum distributions from an inherited IRA to a beneficiary was the 5-year rule. If the IRA owner died before their required beginning date and an election was not made in a timely manner, the account had to be closed by December 31 of the 5th year following the year of death. In 2002, new regulations issued by the IRS changed the default payout to the life expectancy of the designated beneficiary. The 5-year requirement for most beneficiaries was eliminated.

A time machine would be cool to have. Even if it only worked on financial assets, it sure would come in handy. One might jump into the future and see if an investment paid off, or you could look around to see where the smart money succeeded. And if the original investment turned out to be a loser, you could go back in time and sell it – or never even buy it in the first place. Too bad financial time machines don’t exist. Bummer. While literal time machines have yet to be invented and we can’t quantum leap,

The pro-rata rule is the formula used to determine how much of a distribution is taxable when an IRA account consists of both pre-tax and after-tax (basis) dollars. The rule requires that all SEP, SIMPLE, and traditional IRAs be considered as one giant “Starbucks Venti mug of money” for every distribution or Roth conversion. When both pre- and after-tax dollars exist, one cannot just withdraw or convert the basis. (It is important to note that Roth IRAs are NOT factored into the pro-rata equation.) A popular analogy for pro-rata is the “cream in the coffee” comparison. Once a spoonful of cream goes into a cup of coffee, it becomes inexorably mixed and can never be removed as just cream. Each future sip will consist of a percentage of cream and a percentage of coffee.

SIMPLE IRAs are not so simple. One factor that makes SIMPLE IRAs tricky is that they are subject to unique rules, found nowhere else in the tax code, such as the two-year holding period. Two-Year Holding Period When does the two-year holding period begin? This is a question that often creates confusion. The two-year holding period begins with the date the employee’s first contribution is deposited to the SIMPLE IRA. It is not the date employment begins or even the date you become eligible to participate in the SIMPLE IRA plan. 25% Early Distribution Penalty Distributions taken from a SIMPLE IRA before age 59 ½ are subject to an early withdrawal penalty of 25% when withdrawn during the two-year holding period.

Question: IRA HELP, I’ve got a client who is retiring early. He has roughly $1,000,000 in an IRA now which he could initiate a 72(t) with. That will not generate enough cash flow to support their needs. He also has an additional $3 million in his employer’s ESOP which, under the terms of the ESOP, will not be available for an IRA rollover until August of the year after he retires. Can he do a 72(t) with his current IRA and then when he rolls out the funds from the ESOP can he do a 2nd 72(t) with that? In other words, can you have two IRA’s both with 72(t)s at the same time? Jason Answer: Jason, Yes, a person can have two different 72(t) payment schedules from two different IRAs, but tread lightly. You did not mention your client’s age in your email, which has a significant impact on 72(t) distributions. For the uninitiated, a 72(t) payment schedule allows a person under age 59 ½ to tap their IRA accounts penalty free. However, the payments must continue for the LONGER of five years or until you reach age 59½. If your client is only 45, he is looking at a minimum 15 years’ worth of payments. A lot can happen in that time period, and 72(t) schedules cannot be changed. The payments are ineligible to be rolled over, and any missteps along the way could wreck the entire 72(t) schedule, potentially resulting in a 10% early distribution penalty on all previous distributions. Question: Dear Mr. Slott and team: I hope you can help me. Despite reading much of the IRS web information, and many other websites on RMDs from IRAs, I have some remaining confusion on taking my first RMD. Here's the situation I have questions about: