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Ed Slott welcomes you to The Slott Report, your source for IRA, retirement and tax planning information.

5 Questions Commonly Asked by 401(k) Participants

401(k) questionsOn Monday, we will be celebrating Labor Day, a holiday established to pay tribute to the American workforce. Much of that workforce has access to some type of employer plan and, for more than 50 million workers, that plan is a 401(k) plan. So, with that in mind and in honor of Labor Day, this week we take a look at 5 answers to questions commonly asked by 401(k) participants.

1. I am currently working and contributing to my company’s 401(k). I would also like to contribute to an IRA. Can I do that?

Absolutely! Participating in your employer's retirement plan never prevents you from being able to make an IRA contribution. That said, depending on your total income, your contribution may not be deductible. If neither you, nor your spouse, were covered by a company plan last year, any IRA contributions you made for 2013 would be deductible. That's true whether you made $15,000 or $15 million. If, however, either you or your spouse were covered by a company plan last year, your IRA deduction could be reduced or eliminated depending on your overall income.

2) I have two totally separate jobs that both have 401(k) plans. Can I contribute to both of them?

Yes, you can contribute to both of them. You can strategically allocate your deferrals to get the most out of any company matches that you might be eligible for but, that said, your total salary deferrals to both plans can be no more than the $17,500 limit. If you’re 50 or older by the end of the year, then you can defer a total of $23,00
0 between the two plans. While your salary deferral limit is coordinated between the two plans, if the two employers are unrelated and unaffiliated, you can still receive up to $52,000 in each plan (including company matches and profit sharing components).

3) I am still working and contributing to my employer’s 401(k) plan, but I’d like to roll over my existing balance to an IRA. Can I?

This is a difficult question to answer, because it depends on a number of factors, including your age, the type of money (i.e., salary deferrals, company match) you’re trying to rollover and your plan’s specific rules. That said, if you’re under age 59 ½, and still working, it’s unlikely that you’ll have access to much, if any, of your plan assets to execute a rollover. If, on the other hand, you’re over 59 ½ and still working, it’s generally going to be up to the specific rules in your employer plan as to how much, if any, of your funds you have access to.

4) I want to put money into a Roth account, but my current employer’s 401(k) doesn’t seem to have that option. What can I do?

The law allows an employer with a 401(k) to offer a Roth option within the plan, but there is no law requiring them to do so. If you would like to have this option, it’s worth asking your employer if they’ll consider amending the plan to add it. In absence of that, you can make a contribution to a Roth IRA, assuming you’re eligible to do so. For more on that, you can check out this page.

5) My spouse is the beneficiary of my 401(k), but I want it to go to my children. How can I do that?

Under a federal law known as ERISA (which, coincidentally, was signed into law on Labor Day 40 years ago in 1974 by then new President Gerald Ford), your spouse is typically the automatic beneficiary of your 401(k), even if you did not name them as the beneficiary on your beneficiary form. If you want to name someone else, it’s a two-part process. First, you must get your spouse to sign a waiver, acknowledging that they are releasing their rights to your 401(k) assets. Use a professional for this to make sure it is executed correctly. Next, you need to fill out new beneficiary forms that name your alternate beneficiaries. Without completing both of these steps, you’re unlikely to achieve your desired outcome.

- By Jeffrey Levine and Jared Trexler

You Usually Don't HAVE to Name Your Spouse as IRA Beneficiary

If you are married and participate in your employer's ERISA covered retirement plan, such as a 401(k) or pension plan, your spouse must generally be the beneficiary of that company plan. Even if you didn’t name your spouse as the beneficiary, possibly because you weren’t married at the time you started working there, your spouse is usually automatically treated as the beneficiary of your company retirement plan.

IRA spousal beneficiaryWhy does that happen? Typically your spouse must be the beneficiary under pension law (ERISA) and the Tax Code. In fact, if you want to name someone other than your spouse as your plan’s beneficiary, you will need to get your spouse’s written consent to do so. But what about your IRA? Do you have to name your spouse as the beneficiary of your IRA? The answer is usually no.

If you have an IRA, the rules are different. The spousal rules under ERISA don’t control IRAs and the Tax Code doesn’t require you to name your spouse as the beneficiary of your IRA. So, in general, you can name anyone as the IRA beneficiary without having to get your spouse’s permission. However, your state’s law may give your spouse rights to some or all of your IRA or require spousal consent to name a non-spouse IRA beneficiary.

If you’re married and live in a community property state, your state’s law may recognize your spouse as the beneficiary of some of your IRA. Accordingly, you likely need to get your spouse’s written consent if you want to name a non-spouse beneficiary of your IRA.

According to IRS Publication 555 Community Property (revised January 2014) the community property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In Alaska, a married couple can make a community property election. Oftentimes, your IRA custodian’s beneficiary form will have the spousal consent language on the form to make it easier for you to get spousal consent and name a non-spouse beneficiary.

While there are only 9 community property states (10 if you count Alaska), the other 40 states are not. So, in most cases, you don’t need spousal consent to name a non-spouse beneficiary of your IRA. Ultimately, it’s your responsibility to get spousal consent if it’s required by state law. You may need to speak with an attorney who is knowledgeable in the community property rules.

- By Joe Cicchinelli and Jared Trexler

TWO IRA Rollovers From ONE Account in ONE Year: Nothing Good Happens

What happens to your IRA if you accidentally do two rollovers in one year? Nothing good.

IRA rollover mistakeIf you request two distributions on two different dates, then you can decide which one you want to rollover with the 60-day rollover period. As long as you have the funds, the smart choice is to roll over as much as you can of the larger distribution. This reduces the amount you will have to include in income for the year and any 10% early distribution penalties you might owe.

The tougher scenario is one that an advisor asked me about recently. A client had two distributions from one IRA within a one - period. He had rolled them both over. Now it was time to fix the situation. The client wanted to know if he could “keep” the larger rollover and “undo” the smaller rollover thus reducing his taxes and penalties on his mistake.

Unfortunately for this client, the larger rollover was the second one he had done. He has no choice of which rollover to keep. Once a rollover is done, any subsequent rollovers within the one-year period generally become excess contributions in the IRA account, and the second rollover is the one that he must undo.

He has until October 15 of the year after the excess contribution to remove it from the IRA – plus or minus earnings or losses on the excess contribution. He must tell the IRA custodian he is removing an excess contribution so it will be properly coded on the IRS Form 1099-R issued for the distribution. He will owe taxes and penalties, if applicable, on the original distribution – the one he inadvertently rolled over.

When the excess contribution is not timely corrected, then the client will owe a penalty of 6% per year for every year that the excess amount remains in the IRA. He must file Form 5329 to calculate and report this penalty to IRS. This form is considered a stand-alone return. If it is not filed, the statute of limitations does not start to run. IRS can, and has, come back at any time to collect the penalty, interest, failure to file penalties, and, if the amount owed is large enough, accuracy related penalties.

This is not something you want to ignore if you are in a similar situation. Unfortunately, many IRA custodians put their clients at risk by making it easy for them to receive a check to move their funds and making it virtually impossible for them to do a direct transfer to a different IRA account. Direct transfers are not subject to the once-per-year limit.

Beginning in 2015, you will only be able to do one 60-day rollover a year, no matter how many IRA accounts you have. I have no doubts that we will see many clients losing their retirement savings when they are simply trying to move their IRA funds. Compounding this problem is the inability of IRS to allow you to correct the problem. They do not have any authority under the tax code to give you a “do over.”

- By Beverly DeVeny and Jared Trexler

Should I Keep All IRAs Separate?

This week's Slott Report Mailbag looks at combining IRA monies into one big IRA, how 401(k)s affect calculating yearly IRA distributions and whether leaving equal IRA shares to your three children is possible.  As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.


ed slott IRA questions
Send questions to mailbag@irahelp.com
Is there any reason to keep a nondeductible Traditional IRA separate from a pre-tax Traditional IRA? I know the pro-rata rule applies to Roth conversions, IRA distributions, etc. so I was wondering if there's any reason why someone shouldn't consolidate their Traditional IRAs together in order to simplify.


There’s no reason to keep nondeductible money in a separate IRA because the Tax Code treats all of your Traditional, SEP, and SIMPLE IRAs as one IRA for purposes of the pro-rata tax rule.


Hi Mr. Slott,

Really enjoyed your PBS program - have been reviewing your DVDs.

A question to follow-up on your July 10th answer to the Pre and Post Tax monies that was posed by Michael from New Jersey:

I currently have a 401(k) from a former employer that is composed of a "mixed bag" of both pre and post tax contributions. I also own a rollover IRA that contains purely pre-tax contributions and a Roth IRA. The same broker manages all of these accounts. I converted monies from the rollover IRA to the Roth IRA and the 8606 Form that was ultimately generated did not reflect the "pro-rata rule" because I was advised that the monies in the 401(k) are not considered an IRA. Additionally, I was advised that I could continue to convert monies from the Rollover IRA to the Roth IRA without regard to the "mixed 401(k).” Is this correct?


Ed from PA

Yes, that is correct. Funds in your 401(k) plan are not counted for purposes of figuring the taxable amount of IRA distributions, including distributions that are converted to a Roth IRA. The only time a 401(k) plan will affect your IRA conversions is when you roll over 401(k) funds to an IRA.



I am updating my beneficiary forms for my IRAs and have been told by the agent of my IRA Custodian that I may not write in "equal" in lieu of percentages, which add up to 100%. I also cannot indicate 33 and a third percent. I have 3 children and want them to each receive the same amounts. I am trying to follow Ed's advice from the Retirement Rescue packet that I just received through my PBS television network. What should I do? Is the advice I have been given accurate?

There should be a way to leave your 3 children equal shares of your IRA. We suggest that you ask the agent how to fill out the beneficiary form so you can leave your children equal shares. If they say it’s not possible or cannot answer your question, then you may want to consider transferring your IRA to a more cooperative IRA custodian.

- By Joe Cicchinelli and Jeffrey Levine

What Happens to My RMDs If I Annuitize my IRA Annuity?

Note: Earlier this year, in June, the IRS created a new type of retirement income annuity, called qualifying longevity annuity contracts (QLACs). QLACs have special rules with respect to RMDs. The annuities discussed in this article are not QLACs. For more information on QLACs, click here.

One common question both clients and advisors ask is “how will RMDs (required minimum distributions) be calculated from my IRA annuity after the annuitization?” If you have, say, only one IRA, with a $100,000 balance that is annuitized, the answer is simple. The annuitized amount that comes out of the IRA each year will satisfy your RMD obligation.

What if, on the other hand, you’re 74 – so you’re required to take RMDs – and have two IRAs, IRA “A” and IRA “B?” IRA “A” has a $100,000 value and IRA “B” has a $90,000 value, for a combined IRA total of $190,000. That would make your cumulative IRA RMD for this year about $8,000 and there’s no question that, if your IRAs weren’t annuitized, you’d be able to take the full $8,000 total from either of your IRAs separately or, between the two IRA in any amounts you prefer, as long as the total distributions were at least $8,000.
IRA annuities and required distributions
What if, however, you happen to annuitize IRA “A” and start to receive $9,000 a year as a lifetime income stream? Will the $9,000 you receive from the annuity satisfy your total RMD for all of 2014? Here’s where it starts to get a bit tricky.

Believe it or not, there is actually some debate over whether or not a distribution from an annuitized annuity can be used to satisfy RMDs for other IRAs in the year of annuitization. On one hand, once annuitized, IRA annuities generally follow defined benefit plan rules instead of the defined contribution rules. That would lead you to believe the answer is no. On the other hand, RMDs are based off of prior year-end balances. Since the annuitized annuity did have a prior year-end balance and wasn’t annuitized at the time, that might lead you to believe yes. In light of the grayness in this area, the conservative approach is to take the $9,000 annuity distribution from IRA “A” and an additional distribution from IRA “B” based on its prior year-end balance.

After the year of annuitization, things begin to become a little clearer. Most experts agree that there is no way to use the income from the annuitized annuity in IRA “A” to offset any of the RMD that must be taken from IRA “B.” In this situation, your annuity payout will only satisfy the RMD for IRA “A.” To put it another way, under the defined benefit plan rules that the annuitized IRA now follows, the annuity payment is the RMD for that IRA account. Your RMD for IRA B, with a total value of $90,000, would be just under $4,000 next year.

Annuitizing an IRA annuity isn’t a good or bad decision in a broad sense. It’s one that must be looked at separately, in each case, based on its own merits. Either way though, you should understand its effect on your RMDs.

- By Jeffrey Levine and Jared Trexler

The 20% Withholding Problem with Certain Rollovers From Company Retirement Plans

When you retire or switch jobs, you will be entitled to receive the funds from your company retirement plan. At that point you will be notified of your options on what to do with that money. The basic options you have are to receive the funds personally or do a direct rollover (sometimes called a direct transfer) of the funds to an IRA. If you want to do a rollover to your IRA, there are problems if you choose to have the money distributed to you personally.
20% withholding rollovers company retirement plans
When you choose to have your company retirement plan money distributed to you personally, you can still roll over those funds to your IRA within 60 days. However, you will have to deal with the mandatory 20% withholding rules. Those rules say that when a rollover eligible company plan distribution is paid to you personally, versus doing a direct rollover to your IRA, that amount is subject to automatic 20% federal income tax withholding.

Let’s assume you switch jobs at age 50 with $50,000 in your former employer’s 401(k) plan. All of the $50,000 is rollover eligible. You plan to roll over the money to an IRA but you choose to have the $50,000 paid to you personally. You then receive a check for only $40,000. What happened to the other $10,000? It was sent to IRS as federal income tax withholding. Specifically, the plan administrator had to withhold 20% ($50,000 X 20% = $10,000).

The good news is you’re allowed to roll over the entire $50,000, but the bad news is you only have $40,000. If you can come up with the $10,000 from your own personal funds, you can roll over the entire $50,000 tax-free within 60 days to your IRA. You’ll get back the $10,000 that was withheld when you file your tax return for the year (either as an income tax-refund or as a credit to use if you owe taxes to IRS).

If you only roll over the $40,000 you received, the $10,000 you didn’t roll over will be taxable and subject to a 10% early distribution penalty, if applicable. The reason for that is because $50,000 is rollover eligible and you’re only rolling over $40,000.

In hindsight, it would have been better if you had simply chosen to do a direct rollover to your IRA in the first place. The direct rollover avoids the 20% mandatory withholding rules, so all $50,000 would have been transferred directly into your IRA tax-free. If you intend to rollover over your company plan funds to your IRA, the direct rollover is the better choice.

- By Joe Cicchinelli and Jared Trexler

An Unpleasant Experience with IRS

IRS tax paymentAn advisor had a client who had missed part of her required minimum distribution (RMD). No big deal. This happens – frequently. To fix it, you take the RMD that was missed and you file IRS Form 5329 with the tax return. Form 5329 has you calculate the penalty – 50% of what was not taken. However, IRS can waive this penalty for good cause. The instructions for the form tell you how to do this, although they are a bit confusing. Then you attach a letter explaining what happened and requesting the waiver of the penalty.

Apparently the tax preparer did not read the instructions and the penalty was included in the tax due on the client’s return. She did not pay the penalty portion of the tax due because she requested a waiver of the penalty. Now comes the fun part.

The client gets a computer generated letter from IRS telling her she underpaid her taxes, plus interest, plus penalties. She responds, again telling IRS she is requesting a waiver of the penalty. She gets a computer generated notice of levy. So we call IRS.

The advisor and the client were on hold for one hour before a human took their call. At that point I am put in on the call. I explained the situation to the IRS employee. He checks the computer and tells us that the case has been assigned to a unit, but not to an individual yet. In other words, the computer just keeps spitting out notices and no human has yet to look at any of the associated paperwork.

After further conversation, he put us on hold, then came back and said an amended return needed to be filed to fix the mistake and reduce the tax to the correct amount. We are told to just mail it in. It with go with all the other returns and amended returns submitted by the general public. There is no special address, no specific individual, and it would take about eight weeks for the amended return to be processed. We asked “What happens to the levy in the meantime?” Well, that can be put on hold. And he transferred us.

Now we start all over again with the explanation. We are told by this IRS employee that he can do a hold on the levy. It will be good for 30 days. But, we say, it will take eight weeks for the amended return to be processed. We are told to just call us back here in the levy department in 29 days. Don’t worry. All will be fine. Once a person is assigned to the case, then at some point all the paperwork will come together and everything will work out. End of conversation.

Now, I have to say the individuals we spoke with were professional, patient, polite, even cheerful. What is mind boggling to me is that we have an automated collection system that just runs on its own with no input, guidance, or oversight by a human. IRS is apparently so short staffed that there is no one to read the letters sent in response to the automated notices or the notes a taxpayer is told to include on a tax return in the first place.

And what does Congress do about this situation? They are again proposing to cut the funding for IRS. My poor mind is boggled again. This is the department in the government that collects all the money to pay all the bills and to pay the salaries of our Congressmen and their staffs. The ones who suffer the most are the individuals who made an honest mistake on their return and cannot find someone to help them straighten it out; all the while being threatened with the possibility of their bank accounts being levied.

- By Beverly DeVeny and Jared Trexler