The Slott Report

Question: I have a 60 day rollover, and basically the client has what I believe is an uneducated tax preparer. The roll over occurred within the proper 60 days, the custodian sent out the 1099R as a distribution checking box 7, 1, because even they sent the check directly to the new custodian they did not receive a letter of acceptance, so they considered it a distribution. I explained to the tax preparer he needs to complete a 1040 now, and by the end of May the client will receive a 5498 form from the new custodian reflecting a 60 day rollover occurred. The tax preparer says I am mistaken it is taxable now because he has a 1099 form saying it is. Did I not explain this correctly? Thank you Stewart Answer: Hi Stewart, This is an area where we see a lot of confusion during tax season. You are correct. A 60-day rollover must be handled on the tax return by the taxpayer.

Are you a small business owner or a sole proprietor? If so, you may use a Simplified Employee Pension (SEP) IRA plan to save for retirement. These plans are a popular choice for small businesses because they are inexpensive and easier to administer than other retirement plans. While SEPs are pretty straight forward, there are some rules that may surprise you How a SEP Works Contributions, which are tax-deductible for the business or individual, go into a traditional IRA established by the employee. Only the employer can make SEP contributions. Employees do not make SEP contributions.

A little house on Easy Street has one front door. It is a traditional IRA. There is a sign above the lone entry point the reads, “To All Those That Enter, Thy Earnings Will be Taxable.” It does not matter if the money that enters through the front door is a contribution or rollover or transfer. Most of the arriving dollars, and all of the earnings on those dollars, will be taxable when they leave. (Some money that passes through the front door of the traditional IRA house will receive a special wristband the reads “BASIS” and it will not be taxable upon departure. However, those “Basis” visitors will still enter through the single door beneath the “Earnings Will be Taxable” sign.) Every traditional IRA home can be decorated differently. This particular traditional IRA house has an ETF sofa, an individual stock leather chair, and a couple of mutual fund recliners. The traditional IRA across the street might have four ETF sofas, or the living room may well be adorned with a dozen mutual fund folding chairs.

Question: Planning Question - for retirement plans that permit Non Roth After Tax Contributions, could the company use Qualified Matching Contributions (QMACs) for the NHCEs to satisfy the ADP & ACP testing allowing the HCEs to max out their 415(c) ceiling above their own deferrals and company match contribution? Or, is there a better way for the HCEs to max out up to the 415(c) ceiling? Rick Answer: Rick, Qualified Matching Contributions, or “QMACs,” are used to help plans pass the Actual Contributions Percentage Test (ACP). Since after-tax contributions are included in the ACP Test, QMACs can be used to help plans pass

Tax rules can be confusing, and that can especially be the case when we are talking about the application of two separate rules. It’s easy to get confused when two or more tax laws intersect. For many, that occurs when we discuss the separate account rules for IRA beneficiaries along with the special rollover rules afforded to spousal beneficiaries. If an IRA account has multiple beneficiaries, and that account is not split by December 31st of the year after death, then all beneficiaries are stuck using the life expectancy of the oldest amongst them. That treatment lasts until the account is emptied. For non-spouse beneficiaries, all post-death beneficiary Required Minimum Distributions (“RMDs”) must also begin by December 31st of the year after death. On the other hand, spousal beneficiaries can roll over inherited amounts to their own IRA accounts, essentially changing when RMDs begin. Spouses also get favorable treatment when calculating those RMDs. To illustrate, let’s take a fairly common example.

Whether by choice or necessity, many Americans are still working long beyond what has traditionally been retirement age. If you are a member of this group, you may be keeping funds in your employer plan well into your seventies and maybe even later. There are some big benefits to extending a career. You can continue to contribute to your retirement account and may even be able to take advantage of rules that allow required minimum distributions (RMDs) to be delayed. Eventually, however, the time will likely come when you will want to take some or all of the funds out of your plan. You may want to roll over those funds to an IRA. A large percentage of employer plan funds do end up in an IRA eventually.

Question: Is it possible to take the RMD portion of an inherited traditional IRA and convert that each year as the distribution is done into a Roth IRA? Or, is the only way to accomplish this is to take the distribution and then make a contribution, which limits the amount I can put in each year? Thanks, Lynn Answer: Lynn, No, RMDs from an inherited IRA cannot be converted to a Roth IRA. “Required minimum distributions” are just that, required. Whether from an inherited IRA or from an IRA by the original owner, they must be removed from the account.

Edward was born in 1950. Traditional IRA accounts would not be established until the Employee Retirement Income Security Act of 1974 (ERISA). In 1975, Edward and many other Americans took full advantage of this tax-deferred savings opportunity. The maximum contribution limit in 1975 was $1,500, and Edward contributed the full amount to his IRA every year. Contribution limits increased to $2,000 in 1982 and to $3,000 in 2002, and each year Edward squirreled away the maximum amount. The over-50 catch-up contribution provision became effective with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) when Edward was already over 50, so he leveraged the new rules to dial up his savings.

I’m sure you’ve heard countless advisors mention that a direct transfer (or direct rollover) is the best way to move funds between IRAs or qualified retirement plans. But do you understand why? There are a number of reasons, and in this installment, we discuss some of those in greater depth. Background: Direct Transfer vs. 60-day Rollovers It is important to under the difference between a direct transfer (or direct rollover) and it’s alternative, a 60-day rollover (or indirect rollover). Direct Transfer – A direct transfer and a direct rollover have identical meanings. The only difference is the tax code uses the term “direct transfer” when discussing IRAs and “direct rollovers” when addressing qualified plans. In either event, we are talking about a distribution where the funds are payable to another tax-deferred account. They are not paid to the account holder. There are two ways to directly transfer/rollover IRA and qualified plan accounts:

Question: I have a question about avoiding RMDs for a still-working 72 year old in a 401k plan. Suppose they don’t have to take 401k RMDs due to the still-working exemption from RMDs. Let’s say the person knows they will retire next year in February 2020 when they will be 73. If they do an IRA rollover while still employed in January 2020, would that avoid the RMD for the 401k plan? Is it correct to assume that the rollover amount from the 401k would not be included in the IRA RMD calculation for 2019, but would be included for 2020 (since 401k amount was not in IRA at end-2018, it would not be included in calculation)?