Regardless of the topic, we could all use an occasional refresher. Retirement account rules are incredibly complicated, and we all have our blind spots. Even seasoned financial advisors with extensive client lists can overlook certain details. I had a conversation recently with a respected professional who was operating on a misconception regarding the still-working exception. Fortunately, we were able to identify the oversight and make the necessary corrections. But the conversation confirmed, once again, that understanding the rules is paramount to success.
Thank you for all you do to educate the public. I’m hoping you guys can settle a debate that’s been going on with a few financial advisors and CPAs regarding the 5-year rule for Roth IRA conversions. I was under the impression that a non-taxable conversion can be withdrawn at any time, even within 5 years of the "backdoor" contribution/conversion, without a 10% penalty.
Health Savings Accounts (HSAs) may be one of the biggest tax breaks currently available. If you have a qualifying high-deductible health plan, you may make a deductible contribution to an HSA. There are no income limits for eligibility to contribute. You can then take tax-free distributions from your HSA to pay for qualified medical expenses.
There are two ways to move money from one IRA to another: a direct transfer or a 60-day rollover. With direct transfers, the funds are sent directly from one custodian to another. The IRA owner has no ability to use the dollars while they are in transit, and the transaction does not create any tax reporting. A direct transfer can be processed electronically, or a check can be sent.
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
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 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).
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.
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.
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.
