The Slott Report

Question: I am still working at age 71 and don't really need the required minimum distributions (RMDs) from my rollover IRA. The IRA was funded largely with distributions from a tax-qualified pension plan and a tax-qualified 401(k) plan. Some deductible contributions were made many years ago as well. I would like to transfer some of the IRA into my current employer's 401(k) so as to reduce RMDs until I terminate my employment with my current employer. I am not a 5% owner of the company, so I don't currently have to take RMDs from the 401(k).

My son is 14. I make every effort to expose him to a wide array of cultural elements. A variety of music. Plays. History. Food. Movies from the 80’s and 90’s are a significant slice of the “Understanding Social References” pie chart. Ferris Bueller’s Day Off, Breakfast Club, Shawshank Redemption, Terminator, Sixteen Candles. Currently queued up on the DVR is Top Gun. Goose and Maverick pushing the limits in their F-14 Tomcat fighter jet. Iceman. Jester. “Never leave your wingman.” Kenny Loggins singing “Highway to the Danger Zone.” If a person wants to recklessly fly through the jet wash of the 60-day rollover window and use their IRA funds for some risky pursuit, they better stick close to their advisor wingman. Peril lurks. Engines could flameout.

Retirement accounts are supposed to be for saving for retirement. If you tap your retirement savings before reaching age 59 ½, you run the risk of being hit with the 10% early distribution penalty. However, there are exceptions to this penalty. Some apply just to IRAs and some apply just to employer plans. However, the following six exceptions apply to BOTH distributions from IRAs and employer plans. 1. Death A distribution taken from an inherited retirement account after the death of the owner is never subject to the 10% penalty. It does not matter what the age of the owner was or what the age of the beneficiary is.

Question: Here is the situation. The mother is deceased and the father is in jail. He has two minor kids that need the money out of his traditional IRA. Could all of the money be taken out and considered a hardship distribution to avoid the 10% penalty on the entire account? Answer: Unfortunately, no. There is no such thing as a “hardship distribution” with IRA accounts. A 10% early withdrawal penalty generally applies to IRA withdrawals taken before age 59 ½. But the tax code includes several exceptions to the 10% penalty for withdrawals taken for certain specific reasons. For example, taking a withdrawal to cover the costs of higher education expenses, first time home buying, and health insurance if you are unemployed all qualify for the penalty exception.

Like cassette tapes and slide rules, defined benefit (DB) plans are becoming relics of the past. It’s estimated that 88% of private sector employees with a company plan in 1975 were covered by a DB plan. Today, that number is less than 20%. One reason is the advent of 401(k) plans and other defined contribution plans. Another reason is the decline of the unionized workforce, since DB plans have traditionally been collectively-bargained. Most importantly, DB plans have become increasingly expensive. Congress has tightened the plan funding rules, which has led to higher employer contribution requirements. Also, plan sponsors must employ an actuary and pay premiums to the Pension Benefit Guaranty Corporation (PBGC), a quasi-governmental agency that insures DB plan benefits up to a certain level.

People stumble over themselves all the time. Bad advice is provided, misinformation gets freely disseminated, and sometimes normally smart individuals do less-than-smart things. Stories of good folks fouling up their required minimum distribution are rife. After all, the RMD rules contain a veritable minefield of traps and potential tripping hazards. Based on nothing more than personal experience, anecdotal evidence and conversations with industry insiders, here is a Top 10 list of RMD Goofs, Gaffes and Blunders: 10. Rolling over an RMD. RMDs are not eligible to be rolled over. This happens most frequently when company plan assets are rolled over to an IRA. If the RMD is not taken first, you now have an excess contribution in the IRA that needs to be corrected.

Question: Hello, I’ve been a follower of Ed’s expertise for over 10 years. The information has always been helpful and clearly explained. At this time, I’m looking to help a client minimize her taxes. She recently inherited an IRA from her father. She has taken the “Stretch IRA” option and is now receiving her required distributions. Can she utilize a Qualified Charitable Distribution to her church (verified 501c3) to reduce her tax liability and still maintain the stretch IRA? Answer: Yes. Qualified Charitable Distributions (QCDs) are available to beneficiaries.

Are you questioning that IRA contribution you made for 2018? Maybe you made a Roth IRA contribution and then discovered your income was too high. Maybe you made a traditional IRA contribution but you were ineligible due to your age. You may have made a traditional contribution and just changed your mind. You’d rather contribute to a Roth IRA or maybe not contribute at all. There is good news if you act quickly. You can fix these issues by correcting your 2018 IRA contribution by the upcoming October 15, 2019 deadline. October 15, 2019 Deadline When it comes to the timing for correcting a contribution, the key deadline is October 15 of the year following the year for which the excess contribution is made.

If you run a small company, you may be reluctant to offer a retirement plan to your employees because of the cost of plan administration and compliance. If so, you’re not alone: approximately 38 million American workers lack access to a company savings plan. Recently-issued Department of Labor rules may provide some relief. The rules are designed to make it easier for unrelated companies to provide a retirement savings plan by joining an “association retirement plan” (ARP). Current rules. Under current rules, unrelated companies who want to participate in a jointly sponsored retirement plan are required to join a “multiple employer plan.”

Question: Could you please direct me to information that tells me how any conversions I make from my regular IRA to a Roth will be taxed. My belief was that the amount of any conversion will be taxed at whatever my tax bracket is for the year in which I make the conversion. Is that correct? Therefore, all other things being equal, it is preferable to make the conversion in years where my tax bracket is lower. Thanks for your help. Joann Answer: Joann, You are 100% correct. Any conversion from a traditional to a Roth IRA will be taxed at your tax bracket for the year in which you make the conversion. (One is not allowed to make a “prior year conversion.”) As for your second comment – also yes.