he road to retirement is long. Along the way you may need or want to move your retirement funds. Maybe you are leaving a job or maybe you are just looking for a new investment strategy. When the time comes to make a move, you will want to be sure that everything is done correctly. Rolling over retirement funds can be tricky and the consequences of a mistake can be serious. Here are 6 things about rollovers that every IRA owner needs to know.
1. How rollovers work
A 60-day rollover starts with a distribution from a retirement plan payable to you. The distribution can be from a company plan or an IRA. You will have receipt of the funds.
Every single month since January of 2014, Billy Joel has headlined a sold-out show at Madison Square Garden. Demand for tickets to see the Piano Man has not waned. Ticket sell out quickly. Millions of fans will attest that Billy Joel, who’s music career spans decades, still puts on an incredible show.
It’s hard to believe that Billy Joel just recently celebrated his 70th birthday on May 9, 2019. We don’t know for sure that Billy has an IRA, but if like millions of Americans he does, then 2019 is an important year for him.
Question:
I am over 70.5 and I have to take an IRA minimum distribution or else pay taxes and penalties on scheduled amount. My question is - can I take the mandatory distribution which I will pay taxes on anyway and then roll the distribution into my ROTH IRA? So far I have several YES and several NO answers. Your input would be the deciding vote for me. What say you??????
Thanks
Jimmy
Answer:
Jimmy,
As the deciding vote, we can say unequivocally that RMDs are not eligible for rollover to another IRA and are not eligible for conversion to a Roth IRA.
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.
Question:
I am a financial advisor and want to be clear on something. If a client has a SIMPLE IRA that they are contributing to and have an IRA and are 70.5, can they aggregate the distributions for both and remove from the IRA?
Wanda
Answer:
Aggregation of RMDs is a tricky area and we see lots of mistakes. SIMPLE IRAs can be confusing as well because sometimes these accounts follow the IRA rules, and sometimes they follow plan rules.
When it comes time to calculate your required minimum distribution (RMD) from your IRA, you may wonder which life expectancy table to use. Last updated by the IRS back in 2002, there are three possible tables for IRA owners and beneficiaries, and they can all be found in IRS Publication 590-B.
The three tables are the Uniform Lifetime Table, the Joint Life Expectancy Table, and the Single Life Expectancy Table.
Uniform Lifetime Table
If you are taking RMDs from your IRA during your lifetime, this is most likely going to be your table. This table is used by most IRA owners for figuring lifetime RMDs from their IRAs. The only IRA owners who will not use this table are those whose spouse is their sole beneficiary for the entire year and is more than 10 years younger.
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:
The IRS has announced the 2020 inflation-adjusted limits for Health Savings Accounts (HSAs).
How an HSA Works
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 owned and controlled by the individual, not the employer.
An HSA is designed to be used in conjunction with a high deductible health plan (HDHP). The HSA can be used to pay for health expenses until the plan deductible is met. The HDHP would then cover the high-cost medical expenses.
