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

Using Life Insurance to Protect IRA Values

Life insurance is not only the single biggest benefit in the tax code, but it is also the most cost effective way to protect a large-balance IRA. Many owners of large-balance IRAs are concerned about protecting IRA values during volatile markets. Life insurance proceeds can do just that with its incredible leverage.

Life insurance proceeds are, with few exceptions, free of all income tax. Life insurance can also be exempt from federal estate tax when structured properly. If the insured has any rights or powers over the policy (so called, “incidents of ownership”), the proceeds will be included in his or her estate and be subject to federal estate tax and potentially state estate tax as well. In order to avoid estate tax on the proceeds, many individuals have their life insurance policies owned by a spouse, children, or others. In these cases, the policy proceeds are paid to the owner’s beneficiaries free of federal and state estate tax.

However, problems can arise when another person owns your life insurance policy. With full ownership rights, this person could make whatever changes he or she desired to the policy, such as changing the beneficiary or canceling it prematurely. To avoid these problems, the policy can be purchased by, or transferred to, an irrevocable life insurance trust (ILIIT) so that it will not be included in your estate. Of course, in order for this to work you cannot be a trustee or beneficiary of the trust because being either would represent an incident of ownership on your part.

If finding the money to pay the premiums will cause you a financial hardship, consider withdrawing funds from the IRA to make those premium payments. After age 70 ½, mandatory withdrawals from a traditional IRA must begin anyway. Since the money will have to be withdrawn, it may as well be leveraged to pay the life insurance premiums. This works even better with a Roth IRA as you probably won’t have to worry about paying any income tax on the distributions.

As far as the actual payment of the policy premiums is concerned, it should be done by the beneficiaries or by the trustee of an ILIT so that the life insurance proceeds will be estate tax free. The premium payment money may come from you making tax-free gifts either to the beneficiaries or to the trust. You should not make the payments directly to the insurance company.

After the IRA owner’s death, the life insurance proceeds will be available to pay the estate tax or provide other liquidity so that the IRA assets won't have to be used. The idea behind all of this is to keep as much of the IRA money intact as possible at the IRA owner’s death so that the maximum amount is available to be stretched by the beneficiaries. And what if there is no estate tax to be paid? Your beneficiaries receive an income tax- and estate tax-free payout. I don’t think they will complain about that.

-By Marvin Rotenberg and Jared Trexler

Ed Slott Video: Naming a Minor as an IRA Beneficiary

Ed Slott's video blog answers a consumer question on naming a minor as an IRA beneficiary. America's IRA Expert discusses the pluses and pitfalls of this approach as well as the possibility of using a trust in this process.

60-Day IRA Rollover Automatic Waiver: What IRA Custodians Don't Know or Want You to Know

Let's assume you did the unforgiveable and took a distribution from your IRA (or other retirement plan) that was payable to you, other than a required distribution. Within 60 days you presented the funds to an IRA (or Roth IRA) custodian for redeposit. Then something happened and the funds do not end up in an IRA (or Roth IRA) account. You do not discover the error immediately. Typically it is discovered at tax time. What are your options?

You could just give up and pay income tax and the 10% early distribution penalty, if applicable, on the distribution. The financial institution or your tax advisor may suggest you go for a Private Letter Ruling from IRS asking for more time to complete the rollover. There is an IRS fee for this service and a fee for a preparer to put together the ruling request. Then there is the waiting period while IRS investigates and makes a determination on your request (average time is about nine months).

Or, you might be able to make use of the automatic waiver of the 60-day rollover rule. The following conditions must be met to qualify for an automatic waiver.

• The taxpayer must follow all procedures required by the financial institution for completing a valid rollover – including giving instructions to deposit the funds to an IRA account

• The funds are not timely deposited to an IRA account due solely to an error on the part of the financial institution.

• The funds must be deposited into a valid IRA account by one year from the beginning date of the 60-day rollover period.

• If the financial institution had followed the taxpayer’s instructions, there would have been a valid rollover.

These requirements are found in IRS Revenue Procedure (Rev. Proc.) 2003-16 issued by IRS on January 8, 2003 in Section 3.03.

There is no reporting requirement to IRS on the part of any custodian that utilizes the automatic waiver provision. Why don’t the financial institutions offer this option more often to account owners? Perhaps they don’t want to admit guilt, perhaps they want the IRS “blessing” of a PLR, or perhaps they just don’t know about the automatic waiver. But now you do.

-By Beverly DeVeny and Jared Trexler

Inherited IRAs, SEP IRAs, Net Unrealized Appreciation Highlight Mailbag

This week's Slott Report Mailbag features questions (and our answers) about inherited IRAs, SEP IRAs and Net Unrealized Appreciation. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

Send Your Questions to mailbag@irahelp.com

Hello Ed and Company,

My mother recently passed away, and we three children are inheriting an annuity. Is it possible to roll each portion to an IRA to keep the money growing tax free? 

Thank you, 


It is possible to split the annuity into three separate shares. You should, however, check with the annuity company to see if they will allow the split. Assuming they will, you want to have the three separate shares in inherited IRAs established for each of the three beneficiaries prior to 12/31 of the year following your mother’s death. I f that is completed on time, then each child can take their annual RMDs (required minimum distributions) using their attained age, in the year following the year of your mother's death. If the 12/31 date is missed, then each child's annual RMD would be based on the age of the oldest beneficiary.

You want to insure that a check is not issued payable to a beneficiary. If that happens then there cannot be an inherited IRA and the full amount will be fully taxable. The best way to go from your mother's IRA to inherited IRAs is to do a trustee-to-trustee transfer. One other thing, when establishing the inherited IRAs make sure your mother's name appears in the title.

Hello Ed Slott and Company,

I have been reading through various IRS publications to no avail. Repeated Google searches have proved fruitless as well. I recently sent a letter to the Internal Revenue Service Commissioner. As I have not received any information yet, I was hoping you might be able to shed some light on the following question:

A registered sales manager makes about $32,000 per year. He contributes the maximum each year to his 401(k); the 401(k) contributions come from his earnings as sales manager.

In addition to the aforementioned income, he also has commission-based income of $100,000 to $140,000 per year from the same company.

He is paid as a “statutory employee” per his 2010 Form W-2.

Could he, in such circumstances, contribute to a SEP [in addition to the 401(k) contributions mentioned above] from his commission-based earnings? Please note: these earnings are reported on his tax return as Schedule C, but they do show on his 2010 Form W-2.

Amy insight you could provide is much appreciated.


You have to first determine if the client is self-employed or not. Only a truly self-employed individual can establish a SEP IRA.

I have a 401(k) with substantial after-tax contributions (both pre 1986 and post 1987 after-tax contributions). The plan also holds company stock contributed by my employer on a pre-tax basis, and company stock purchased with my contributions on both a pre- and post-tax basis. My 401(k) custodian tracks all of this cost basis information separately for each type of contribution (pre 1986, post 1987, before tax, after tax, company contribution earnings etc.). I am 57 years old, and I retired from my employer after my 55th birthday.

I plan to take an NUA (net unrealized appreciation) distribution of the company contributed stock in 2013. My after-tax contributions will exceed the cost basis of the stock that I am taking out as an NUA distribution, so I understand that I will not owe any taxes in 2013 on the NUA distribution, that the cost basis of these shares will be zero, and that the amount of my after-tax contributions in my 401(k) will be reduced by the basis of the NUA shares that I withdrawal.

I would like to contribute the remaining after-tax contributions in my 401(k) to a Roth IRA and roll over the remaining pre-tax contributions to a traditional IRA. I called the IRS and asked about this; the agent that I spoke with reviewed Publication 575, and told me that as far as he could tell, as long as the 401(k) custodian can separate out the after-tax contributions, I could roll them over to a Roth IRA without any tax consequences. Am I allowed to do this?

The cost basis of the company stock in the 401(k) plan is determined by the purchase price when purchased by the plan, not by the pre- and after-tax amounts you have in the plan. Some shares in your account will be taxable and some may not be, depending on whether they are purchased with pre-tax contributions or after-tax contributions. To avoid an early distribution penalty of 10% on the taxable amount of the NUA distribution, you must be age 55 or older in the year you separated from service.

-By Marvin Rotenberg and Jared Trexler

Phishing Scams

Caveat emptor – Consumer beware!

Have you ever received an email, text message or automated phone call from what appears to be your bank or other financial institution warning you that there is a problem with your account? Perhaps you’ve received one informing you that your account has been locked due to too many unsuccessful attempts to access the account, or some other reason that requires you to “verify” or “confirm” your information and/or identity in order to fix the problem? If this sounds familiar, you just might have been scammed due to a process known as “phishing,” which rhymes with “wishing,” as in “I’m wishing this phishing problem never happened.”

Phishing is defined as the act of sending an email or other notification to an individual falsely claiming to be an established, legitimate enterprise in an attempt to scam the individual into surrendering private information that could be used for identity theft. Here is how the scam may work.

You receive a message containing a link to a “spoofed” website that has all the appearances of being that of your bank or other financial institution or company, but in fact is a bogus one set up to look legitimate. The website requires you to enter confidential information such as your bank account number, ATM PIN, credit card number or social security number. Once you’ve done that, the floodgates have opened and it’s open season on your financial well-being.

“Vishing”, or voice phishing, is a twist on the phishing scam. Instead of asking you to click on a link to a bogus website, the vishing email, text message or phone call will ask you to call a financial institution or a bank to verify your information and/or identity. When you call the number provided, you will be connected to an automated response system or a person pretending to work for the financial institution. You will then be asked to provide personal and confidential information such as your social security number, credit card number or your card’s three-digit security code. As with the phishing scam, once you have provided this information, the scammer can use it to drain your bank account, open other accounts in your name, steal your identity or sell your information to other identity theft criminals.

Here are some tips for identifying a scam:
• You receive an email, text message or automated phone call urgently asking you to verify or confirm information such as your social security number or your bank account number. A legitimate financial institution, the IRS, or Social Security Administration will never call or email you asking to verify or provide this information.

• An email, text message or automated phone call urgently tells you that if you do not verify account information, your account will be frozen.

• An email from your financial institution or from an online vendor includes a link to a website that asks for personal information such as account number, social security number, etc.

How to avoid being scammed:
• If you are still worried about your account being frozen or suspended do not respond to the message or call the number they provide. Call your bank or institution directly.

• Do not enter your bank account number, credit card number, social security number or other personal information into a website to which you were linked through an email.

• Check the legitimacy of website links sent to you in an email by checking for the security padlock on the bottom of the screen or a web address beginning with https.

Unfortunately, scammers will always be out there in one form or another. By being knowledgeable about their methods, you’ll stand a much better chance at thwarting them and keeping your financial well-being intact.

-By Marvin Rotenberg and Jared Trexler

Ed Slott Video: Mitt Romney's Unorthodox IRA

Ed Slott discusses Republican presidential candidate Mitt Romney's unorthodox IRA in this video blog. The Wall Street Journal posted a January 19th article on this topic, and Ed walks you through Romney's reported account value, its pitfalls, tax expenses and what steps he should take now to avoid problems down the road in this video. This issue has come up several times in discussions about Romney's reported wealth, his assets and the release of his tax returns.

How to Retitle an Inherited IRA

You have just inherited an IRA or employer plan from someone other than your spouse. What now?

The first thing we tell beneficiaries is, “Touch nothing.” At least not until you talk to someone who knows the rules for inherited accounts.

The number one rule for an inherited IRA is never, never, NEVER put the inherited funds into an IRA in your own name. Don’t request a check payable to you either. Both of those actions create a taxable distribution to you, the beneficiary, and you no longer have a tax deferred account.

Of course, maybe you have big plans and you are going to spend all of the money right away so the taxes aren’t a big issue for you. Consider, though, what you are giving up. Let’s say you inherit a $100,000 IRA at age 30. If it earns 6% a year and you take only required distributions each year, the IRA will eventually pay you over $650,000 over the next 54 years. In the first 10 years you will only get a check for $2,000 - $3,000 a year, but you can then write a check in that amount to fund your own IRA or Roth IRA, if you qualify.

The trick is in the titling of the inherited IRA account. You must leave the name of the original account owner in the account title.

For example, John Smith, deceased, IRA for the benefit of (fbo) James Smith. 

This does not create a taxable distribution and you can then “stretch” the distributions over your life expectancy.

So, do yourself a favor and touch nothing. Then talk to someone who understands these rules and can show you the potential of the inherited retirement account. Then make an informed decision. If you choose to stretch your inherited account, you can sit back and collect easy money each year. Oh, and be sure to name your own beneficiary on the inherited account. They can continue to collect your payments if anything happens to you before the inherited account is emptied.

-By Beverly DeVeny and Jared Trexler

Required Minimum Distributions From All Angles in Mailbag

This week's Slott Report Mailbag delves into the oftentimes complicated world of required minimum distributions (RMDs). We look at RMDs after conversions, recharacterizations and the "still-working" exception. We also answer a question about when you can recharacterize a Roth IRA conversion. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.


Happy New Year. I get your regular updates from www.irahelp.com and www.theslottreport.com, and they are great!

Send your questions to mailbag@irahelp.com
I may need to access around $11,000 from my Roth IRA, and I want to understand what the cost, fees and tax (if any) implications are. I spoke to a rep over the weekend and he said possibly re-characterizing the conversion could be helpful. Further, he suggested going to irs.gov and researching pub 590 (page 60 chapter 2) as it kind of spells out what the implications would be pertaining to my proposed scenario. So, besides a sales charge, 10% withdrawal penalty and taxes on earnings, what total costs would I be saddled with if I access this money?

If memory serves me correctly, I converted the IRA to Roth in 2010 and my accountant is spreading the taxes over 2 years. This may or may not effect what I am trying to do.

Any feedback on this would be greatly appreciated.


Jason De Ruggiero

You should look at IRS Pub. 590 as it outlines the rules about recharacterizations and when you can and cannot recharacterize.

If you converted to a Roth in 2010 you had up to October 15, 2011 to recharacterize.

If you have had any Roth IRA established for 5 years and you are over age 59 1/2, there is no problem accessing any funds in your Roth IRA. You can always withdraw a converted amount without incurring a penalty or income taxes if the requirements mentioned above are met. It is generally the earnings in the Roth account that cannot be accessed without income taxes unless certain requirements are met. The ordering rules state that when taking withdrawals all Roth IRAs are considered one account. All contributions are considered to come out first, then converted amounts (first in, first out) and lastly earnings. We can’t be more specific on your situation without knowing what amounts have gone into your Roth accounts, if those amounts were contributions or conversions, your age, and when your first Roth IRA was established.


If a 71-year-old is fully employed this year, contributing to their 401(k), when must they take their first RMD (required minimum distribution)? I have read it’s the year after they retire. If that’s true, do they have to take two distributions (April and December) that year? How long can they delay taking an RMD if they are fully employed? I have read one has to take a distribution the year they turn 75.

Thank you for your help!

If you are less than a 5% owner of the company, are still working after age 70 ½, and if the employer plan allows, then you would not have to commence RMDs until the year you separate from service. You should check the plan document or summary plan description to see if the plan has that provision in it. The first RMD is due for the year of separation from service and can be deferred until April 1 of the following year. If it is deferred, then two distributions will have to come out in that year. I believe the age 75 you mentioned applies only to 403(b) plans. In a 403(b) plan, balances prior to 1/1/86 don't have to be used for calculating RMDs at age 70 1/2. Those balances will then be added back in for RMDs when the participant attains age 75.


Good afternoon Ed!

Here are the facts: A 61-year-old taxpayer converted his traditional IRA to a Roth IRA in 2010. In January 2012, he withdraws the entire amount of the converted IRA including contributions, conversion amounts, and earnings.

My question is this. Can the taxpayer contribute only the earnings of the converted IRA back to the converted IRA account to avoid taxation on the earnings in 2012?



A taxpayer has 60 days from the receipt of Roth IRA funds to do a rollover to another Roth IRA account. It is up to the taxpayer to track which Roth funds are derived from contributions to a Roth IRA, conversions to a Roth IRA, and earnings. In addition, all Roth accounts are considered one account for the purposes of the distribution rules. Distributions are deemed to come first from contributions, then conversions (first in, first out), and lastly from earnings. Assuming the taxpayer has emptied all Roth accounts and does only a partial rollover, you would have to assume that the first dollars rolled over would be earnings. You should go through the calculation on Part IV of IRS Form 8606 to see how it will work out.

There will be no tax on the earnings if the taxpayer had established any Roth IRA in 2007 or earlier since he is over the age of 59 ½.

-By Marvin Rotenberg and Jared Trexler

Life Expectancy Tables and Required Minimum Distributions

IRS regulations governing required minimum distributions (RMDs) from IRAs and employer-sponsored retirement plans were in proposed form only from 1987-2000. Sweeping changes to these proposed regulations in 2001 led to the issuance of long-awaited final regulations in 2002, dramatically altering the way owners and beneficiaries of these accounts and plans calculate the distributions they are mandated to take from them.

The correct age to reference in any of the tables corresponds to the age of the IRA owner, plan participant or beneficiary as of December 31 of the year in question. For individuals taking their first distribution due to attainment of age 70 ½, the life expectancy factor for age 70 will be used for those born between January 1 and June 30th, while age 71 will be used for those born between July 1 and December 31.

Key components of these revised regulations were the introduction of a new life expectancy table to be used by most IRA owners and plan participants and increases in life expectancy factors for the two existing tables, reflecting the longer lives lived by modern-day individuals. Introduction of the new life expectancy table was also an attempt by the IRS to answer pleas made by consumers and practitioners for simplification of the RMD rules, which were considered extremely onerous to satisfy and often resulted in financially severe consequences to those unable to master their complexities.

These life expectancy tables are identified and described below, and are also available at our website (www.irahelp.com) under the “IRA Resources” tab, as well as in Appendix C of IRS Publication 590 (www.irs.gov under “Forms and Publications”). It is critically important that RMDs be calculated using the appropriate life expectancy table. Any shortfall in the timely payment of an RMD may result in the assessment of an IRS excise tax penalty equal to 50% of the amount not withdrawn. As you can see, our government is deadly serious about the accurate and timely payment of RMDs from IRAs and other retirement plans.

Uniform Lifetime Table

The Uniform Lifetime Table, introduced via the revised proposed regulations of 2001 and incorporated into the final regulations of 2002, is used only by IRA owners and plan participants for calculating lifetime-required distributions. Under this table, the beneficiary is considered to be exactly 10 years younger than the owner or participant, regardless of the beneficiary’s actual age or even if no beneficiary has been designated.

Users of this table reference it annually to obtain the new life expectancy factor for the year. An individual can’t outlive it as it never reaches zero. Beneficiaries never use this table.

Joint Life Expectancy Table

The Joint Life Expectancy Table is used only by IRA owners and plan participants whose sole beneficiary for the entire year is their spouse who is more than 10 years younger. Use of this table provides for a longer life expectancy factor than that yielded by the Uniform Table, resulting in a smaller RMD.

The “sole beneficiary for the entire year” rule is determined using the IRA owner’s or plan participant’s marital status as of January 1 of each year. It is satisfied even if the spouse beneficiary dies during the year, regardless of whether a new beneficiary is named. It also applies in the case of divorce, provided a new beneficiary is not named in the same year.

As is the case with the Uniform Lifetime Table, owners reference this table each year to obtain their new life expectancy factor for RMD purposes, they can’t outlive the table, and beneficiaries are never allowed to use it.

It should also be noted that IRA owners and plan participants are allowed to switch between the Uniform Lifetime Table and the Joint Life Expectancy Table if any beneficiary changes they make from one year to the next qualifies them to do so.

Single Life Expectancy Table

The Single Life Expectancy Table is used only by beneficiaries to compute RMDs on inherited retirement accounts. It can never be used by IRA owners or plan participants to compute their lifetime-required distributions.

This table is accessed only once, in the year following the year of the IRA owner or plan participant’s death, to determine the beneficiary’s life expectancy factor. This life factor is then reduced by one in each passing year until it is fully exhausted.

There is an exception for spouses who are the decedent’s sole beneficiary and don’t take over the account as their own (or rollover the assets into a retirement account in their own name). They use the table annually to recalculate their life expectancy factor for the new year. These spouses can never outlive the table.

Final Thoughts

Each table yields a specific life expectancy factor for a given distribution year. The market value of the IRA or retirement plan in question as of the previous December 31 is divided by the applicable life expectancy factor, resulting in the correct RMD amount to be paid for the year. Once this minimum is satisfied, account owners and beneficiaries can always take more than the minimum amount. So, even with simplification, the RMD rules remain complicated. The assistance of a financial advisor who is trained in the nuances of this topic will be very valuable when it comes time for you to begin taking RMDs.

-By Marvin Rotenberg and Jared Trexler

Ed Slott Video: Ed Slott's Retirement Planning Life Events

Things in life change every year. You get a new job. You lose a job. You get divorced. You get re-marriaged. Other life events such as death or the birth of a child also trigger retirement plan changes. Ed Slott details the events to watch out for and the important papers that will need updating in this video from IRAtv.

2011 Roth IRA Conversion Deadline

This question comes up ever January. Can I still do a Roth conversion for last year? After all, I have until April 15th to make a contribution to my IRA or Roth IRA for last year, so can I still do a conversion for last year?

The answer is no. While there may be an exception for contributions, there is no corresponding exception for conversions (or distributions). In order to have a 2011 Roth conversion, the funds must leave the IRA or employer plan by December 31, 2011.

The funds do not have to be in the Roth IRA by that date, but they must be out of the IRA by the end of the year. You can do a 60-day rollover where the funds leave the IRA on December 10, 2011 and are deposited in the Roth IRA on February 8, 2012. This is a 2011 conversion since the funds left the IRA in 2011.

If you missed the 2011 deadline and still want to do a Roth conversion, make sure you do not miss the deadline for 2012. You still have those low income tax rates in effect for 2012 so be sure to take advantage of them.

-By Beverly DeVeny and Jared Trexler

Inherited IRAs and IRA Contributions Highlight Mailbag

This week's Slott Report Mailbag answers questions on inherited IRAs (beneficiary forms vs. wills), splitting an IRA at death and IRA contributions. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.
Send Questions to mailbag@irahelp.com


One of four children was made the sole beneficiary of an inherited IRA. The decedent’s will clearly states that all assets are to be divided equally among the 4 heirs (the children). Can the sole beneficiary make a qualified disclaimer to the IRA custodian, allowing the four children to be the beneficiaries thereby allowing the custodian to issue the 1099R (upon distribution) to the four children equally?

The beneficiary form governs where the money from the IRA goes, regardless of what the will states. The sole beneficiary can disclaim all or a part of the inherited IRA within nine months of the death of the IRA owner. The disclaimed portion will then go to the contingent beneficiary named on the designation of beneficiary form. If there is no contingent beneficiary named on the form you will have to refer to the custodian's IRA agreement to determine the default beneficiary. If, by default, the estate is the contingent beneficiary, which is often the case, the other three children would not be able to use their own life expectancies to stretch the inherited IRA. Their distribution option will depend on the age of the account owner at the time of death.


Dear Ed,

An 83-year-old woman and NY resident has an IRA and is making the minimum withdrawals. She wants to leave the IRA to her four sons as an inheritance and has named all four as beneficiaries. A question came up about how the funds would transfer after her death given that all of her children are at varying ages (56, 54, 47, 44). There was a concern that it would not be distributed evenly between them. Any insights are appreciated.

The first thing you want to do is check the designation of beneficiary form on file with the IRA custodian. That will indicate who the beneficiaries are and what percentage they are entitled to. In this case, you want each child to receive one-quarter share.

At the death of the IRA owner, the account should be split, no later than 12/31 of the year following the year of death death, into separate inherited IRAs. If this is done correctly then each beneficiary can use their own life expectancy to stretch their annual RMDs. The way this is accomplished is via a trustee-to-trustee transfer, directly from the decedent’s account to the inherited IRA account.

When establishing the inherited IRAs make sure the decedent's name is in the title.

For example: Mary Smith IRA deceased (date of death) FBO child's name.

In this scenario, each child inherits an equal amount. The distributions over their lifetimes, if everyone takes only the required minimums, will not be equal, as the younger siblings will receive more in total than the older siblings. The trade-off is that they get less each year than the older siblings.


I mistakenly contributed to my SEP IRA for two years after my business was closed instead of contributing to my regular IRA. How can I correct this?


I'm assuming you are referring to your personal IRA contribution amount. That is okay so long as you had earned income to support the contribution in that year. In addition the contribution amount should not exceed the contribution limit for that year. The contribution limit is $5,000, however, if you are age 50 or older by 12/31 of that year you can contribute an additional $1,000 for a total of $6,000.

-By Marvin Rotenberg and Jared Trexler

Ed Slott Video: Ed Slott's 3 New Year's Retirement Planning Resolutions

It's a New Year, and Ed Slott brings you his 3 New Year's Retirement Planning Resolutions in this week's video blog. We hope you enjoy the video and make sure to share it with friends, family and colleagues as well as view more videos at our YouTube page, IRAtv.

Stretching Your IRA

If you don't need all the funds currently in your IRA you might want to "stretch" them. This refers to the process of extending the term of your IRA over multiple lifetimes through the use of existing distribution rules, the power of tax beneficial compounding and sound estate planning techniques.

The stretch maximizes compounding.
The best way to do this with a traditional IRA is to leave it alone and then only withdraw annual required minimum distributions (RMDs) from it once you attain age 70 ½. No distributions from a Roth IRA are required during your lifetime, so if you have one, all the money can stay there and continue to grow tax-free. In both cases, the objective is for the bulk of the funds to be inherited by your heirs, lasting through their lifetimes, while continuing to generate additional wealth through those years.

All the fun begins when you die. (isn’t that always the case?) Your beneficiary will have to take RMDs based on their single life expectancy commencing in the year after your death. This is also true for a Roth IRA. The only difference is that distributions from a Roth IRA will be fully tax-free, provided at least five tax years have passed since you first established a Roth IRA. Until that time, any earnings that are distributed will be subject to tax (but don’t worry about this too much, as earnings are the last dollars distributed from a Roth).

To the extent your surviving spouse is the beneficiary of your IRA he or she can roll some or all of it over into his or her own IRA or simply keep it in your account and be subject to the RMD rules as a beneficiary. In the latter case, if you die before attaining age 70 ½, your spouse can wait until the year you would have reached age 70 ½ to begin to begin taking mandatory payments if he or she is your sole beneficiary.

If you are looking to stretch the IRA over a long period of time you might want to consider naming a child, grandchild, or other younger individual as beneficiary. Doing so will result in a smaller annual distribution due to their longer life expectancy periods, leaving more assets in the IRA with the opportunity to generate additional wealth for the beneficiary.

If the thought of leaving younger beneficiaries with direct control over how rapidly funds can be withdrawn from your IRA following your death distresses you, consider using an intervening trust as beneficiary to control the flow of dollars to these individuals. This will cost you a bit more, but it will be well worth the money if it puts you at ease. You’ll need to employ the services of a qualified financial advisor or attorney to help put this in place, as the rules here are very stringent.

If you are inheriting an IRA make sure the new account is titled correctly. For example, Bill Lee dies and his two children are named equally as his primary beneficiaries. By December 31 of the year following the year of death, two separate beneficiary-inherited IRAs must be established and completely funded (one half to each) and the title of the inherited IRAs should read:

Bill Lee IRA Deceased, [date of death], FBO (name of the child). 

The account title can in no way reflect the beneficiary as direct owner, otherwise the assets will be considered distributed and subject to income tax, as applicable.

Professor Albert Einstein once said “the most powerful force in the universe is exponential notation.” We know this within the context of the compounding of money. You should know it the same way and one of the best examples of this is a stretch IRA.

-By Marvin Rotenberg and Jared Trexler

Non-Traditional Investment Scams

Learn from the mistake discussed here.
I just read a private letter ruling (PLR) issued by IRS allowing an individual extra time to complete a rollover of his IRA assets so that they would not be treated as a taxable distribution. Here is what happened.

The account owner was advised – by his financial advisor – to cash out his IRA in order to invest in trust deeds. “Time was of the essence” so the account owner signed a blank withdrawal form which the advisor would then complete. The account owner was instructed to set up a new IRA to hold the trust deeds. The funds from the old IRA were sent to the account owner’s checking account and he subsequently wired them to an LLC to purchase the trust deeds.

After hearing nothing for several weeks, the account owner started asking the advisor where the trust deeds were. Eventually he was told that the LLC erred and that the purchase of the trust deeds with funds from the checking account could leave him liable for income taxes on the distribution.

In the third month after the distribution, the account owner learned that his funds had never been used to purchase trust deeds. He then began attempting to get his money back from his financial advisor. With the help of another advisor, from the same firm, the account owner was eventually successful in recovering his funds.

What can you learn from this?
Beware of a sure thing.
Beware of transactions that must be completed in a hurry.
IRA investments must be purchased by an IRA.

This transaction cost the account owner lost gains on the account, time and effort to recover his funds, the IRS filing fee for the PLR, which was most likely $3,000 (it is on a sliding scale), and a fee for preparing the PLR request.

Don’t let this happen to you. Take the time to do some research or ask for a second opinion. It could make the difference between having a comfortable retirement or not being able to fully retire.

-By Beverly DeVeny and Jared Trexler

Non-Deductible IRAs, Required Minimum Distributions Highlight Mailbag

This week's Slott Report Mailbag includes several questions on issues not handled by year-end that have carried over into the first month of 2012. One reader also asks our advice on using an IRA to fund a share in a contracted apartment building. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.
Send Questions to mailbag@irahelp.com

I will turn 70 next year. Does it make any sense to use my traditional IRA to fund a share of a (multi-member) private placement LLC? The potential investment consists of a HUD contracted apartment building. In the first year, the managing partners have to sign personally on the bank mortgage. After 366 days, the mortgage will be refinanced and become non-recourse. My question is: will there be unrelated business taxable income (on the leveraged portion of the asset) or is there an exclusion? I would be a passive investor. Can you point me in the right direction? 

Much appreciated,

There are too many variables to provide an authoritative answer to your questions. However, there are some items you must consider: 1. Satisfying your required minimum distribution (RMD) from the account - will there be enough liquidity? and 2. If the property is leveraged, the IRA might have to pay income taxes on earnings attributable to the financed portion. There is an exemption for the first $1,000 of earnings. In order to do what you are suggesting, you will have to locate a custodian that will do the transaction. Perhaps the custodian can provide added guidance. The tax code and IRS have no rules about diversification in an IRA.



My wife's only IRA is one that she inherited from her dad. She has been taking required minimum distributions (RMDs) since 2005. If we open a non-deductible IRA for her and immediately convert it to a Roth will any of the conversion be taxable?


Pasadena, CA

The only taxable amount would be any appreciation on the non-deductible IRA. You don't have to consider the inherited IRA when you convert owned IRAs to a Roth IRA.


My mother died on December 23, 2011, and she did not take an RMD from her IRA for 2011. I am the beneficiary of the IRA. Since there weren’t enough business days left in the year to process the transfer to an inherited IRA, the establishment of the inherited IRA and the withdrawal of the RMD based on her age will not take place until early 2012. How does one deal with this situation?

Does her final return need to include Form 5329 seeking forgiveness for the late withdrawal penalty or do I have to file it with my return? Will I have to report two distributions in 2012; one based on the decedent's age and another based on my life expectancy?

You will have to file Form 5329 with your return. Attach a letter explaining the situation and indicate that you have already taken her 2011 RMD in early January 2012 and ask that the 50% penalty not be applied. In 2012, you will also have to take your first RMD on the inherited IRA based on your attained age on 12/31/12 using the Single Life Expectancy Table.


As a loyal newsletter subscriber for some years I appreciate your IRA insights and now need your help.

How I can reverse my custodian's erroneous duplicate 2011 distribution from my beneficiary (non-spousal) IRA, which has an RMD now based on my own remaining 21-year life expectancy table?

This beneficiary IRA was received from my deceased mother nine years ago and I have properly taken the correct RMD every year since.

In 2011, however, the custodian mistakenly issued an unrequested duplicate distribution through its clearing-house, but refuses to reverse/correct its mistake claiming tax law prohibits ANY reversal in a "Beneficiary, Non-Spousal" account.

Is this true? What is the tax law source for this stated prohibition, for my tax accountant/attorney?

Sadly the custodian is correct about the tax code [§408(d)(3)(C)]. Your only hope is to have them reverse the transaction and suppress the tax reporting for both transactions. We have seen this done in other situations where it was an administrative error. If they will not correct it, you will have two distributions in one year and you will owe income tax on the total amount distributed. You could consider doing a trustee-to-trustee transfer to a more customer friendly custodian.

-By Marvin Rotenberg and Jared Trexler

Taking Required Minimum Distributions From Multiple Accounts

There are many things to consider when determining how much you must take out of your retirement accounts commencing at age 70 ½. You must know how many different accounts you have and what type they are, such as IRAs, 401(k)s and/or 403(b)s. Most importantly, you’ll want to insure that your required distributions (RMDs) are properly calculated and paid in a timely manner because the tax penalty for not doing so is quite severe – 50% of the amount not paid by the appropriate deadline, which for most individuals is December 31 (payment for the first year can be delayed up to April 1 of the following year).

In general, if you participate in more than one company-sponsored retirement plan, an RMD must be both calculated and taken separately from each one. An exception to this general rule applies if you have multiple 403(b) accounts. Here, you still need to calculate the RMD for each account separately, but you can then aggregate them and take the total sum from just one of your accounts or spread it out among any of them in whatever proportion you desire. So, if you have two 403(b) accounts and one 401(k), you would have to take at least two distributions (one from the 401(k) and another from at least one of the (403(b) accounts).

While RMDs from a Roth IRA are not required to be paid during your lifetime you do have to take them from any traditional IRAs you own. One of the biggest benefits of IRAs in comparison to other types of retirement accounts is their relative ease of administration, and one of those benefits is the ability to take a single distribution from just one of your traditional IRAs that will satisfy the total RMD from all your IRAs. Similar to 403(b)s, the RMD for each IRA should be calculated separately, but the total sum can be spread across one or more of them.

The rules applicable to taking RMDs from inherited IRAs are a little bit different. First, RMDs do apply to any Roth IRAs you inherit. Second, while you can use the aggregation rule mentioned above for taking RMDs from multiple IRAs inherited from the same decedent, RMDs for the accounts of different decedents can never be aggregated. In fact, inherited accounts from different decedents can’t be combined in any way. And lastly, RMDs for inherited traditional IRAs and inherited Roth IRAs cannot be aggregated under any circumstances.

In general, a beneficiary who inherits multiple company-sponsored retirement plans of the same decedent must calculate and take the RMDs separately from each company plan.

Sound confusing? It is, and that is why you need to consult with a qualified financial advisor who is knowledgeable in this area. Remember that 50 % penalty mentioned earlier? Your goal should be to avoid that at all costs, and having a competent financial advisor on your side should help you do that.

-By Marvin Rotenberg and Jared Trexler