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Health Care Taxes, NUA, Inherited IRAs and RMDs Highlight Mailbag

The Slott Report Mailbag was full of questions that will keep us busy through the summer!  This week we answered a pressing question on taxes relating to President Obama's Health Care Law, Net Unrealized Appreciation (NUA) strategies, inherited IRAs and required minimum distributions. 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 [email protected]

I recently attended a seminar where Mr. Slott was a keynote speaker and thoroughly enjoyed his presentation.

I understood him to say that income in the future, as a result of the forthcoming "Fiscal Cliff," with no further legislation, would be taxed at higher than current rates and subject to a 3.8% tax (on investment income) to finance the Health Care Reform. Since he also spent a good amount of time discussing Traditional IRA to Roth IRA conversions, I thought that the Traditional IRA distributions would also be taxed the additional 3.8%. However, in a recent article by Eaton Vance, I noticed that the Health Care Reform tax would not apply to amounts withdrawn from qualified retirement plans and IRA’s.

Can you tell me if your interpretation of the 3.8% Health Care Reform tax exempts amounts withdrawn from Qualified Plans and IRA’s?

Beginning in 2013, a 3.8% surtax on investment income will be assessed on high income taxpayers. The income threshold is $200,000 for single filers and $250,000 for joint filers. Withdrawals from retirement plans are excluded from the list of investment income items. Therefore, withdrawals from qualified plans and IRAs are not subject to the 3.8% surtax, but may raise overall income above the threshold amount, which could subject other (investment) income to the 3.8% tax.

Similarly, the taxable income from completing a Roth conversion is not subject to the 3.8% surtax, but also might raise overall income above the threshold. (Editor's Note: You can also CLICK HERE to watch Ed's video on what the new Health Care Law means to your taxes.)


If an amount is transferred to an IRA in a direct trustee-to-trustee transfer, is there a waiting period before any of the funds can be withdrawn from the IRA without the 10% penalty?

Harvey Nusabum

IRA-to-IRA-transfers are not subject to the one-rollover-per-year rule. Therefore, there is no waiting period to withdraw the funds. However, the 10% penalty is a separate issue.

The 10% early distribution penalty applies to distributions to IRA owners who are younger than age 59 ½ when they withdraw the funds, unless an exception to the penalty applies. Some exceptions to the penalty include disability, first home purchases, substantially equal periodic payments (also known as “72t” payments), and higher education expenses.


Can a 61-year-old employee do an in-service distribution to an IRA this year with some of his 401(k) plan, leave the employer stock in the 401(k), and then next year when he retires take advantage of the NUA rule?

Diana DeCharles

It depends on the terms of the employee’s 401(k) plan. Whether or not he can take a distribution while still working (an in-service distribution) varies from plan to plan. Assuming he can take an in-service distribution, a partial distribution of only non-company stock should be allowed. He should ask his plan administrator and get a copy of the plan’s Summary Plan Description to see what his options are. His subsequent retirement would be a new triggering event and would mean that he would become eligible again to use the NUA (net unrealized appreciation) strategy.


Hello Ed,

First, I want to say I love your books and you’re one of America's best financial professionals!

My dad passed away on 2/25/12. Myself and my step-mother where beneficiaries to my dad's traditional IRA, the split was approx. 65% to my step mother and 45% to myself. By the way, she has Alzheimer's and her estranged son is now in the picture to care for her. He is making all her decision'. She also has a life estate to live in the house (it goes to me) as per the prenuptial agreement. She was never put on the deed as required. I think this is a benefit to her at this point because Medicaid can't put a value on it. I think that she will end up in an elder-care facility rather than a nursing home down the road.

My question pertains to this year’s RMD. I know that it has to be taken out because my dad passed away this year. Is there a rule on who has to take it out? I don't want to. What if my stepmother doesn't want to? Am I forced to take the full amount? Do we split it? I am 49 years old. That being said, I have already rolled over the IRA into an inherited IRA. Do I have to start taking distributions next year or can I defer them until I am of age? I know I need to revisit your books. Thanks for all the great advice!


Paul Sofolarides

Assuming your Dad died after his required beginning date this year, then both you and your stepmother must take your respective share of his untaken RMD (i.e., you must take 45% of it). If either you or your stepmother doesn’t take their share of the RMD, then a 50% penalty on the shortfall will apply.

We will also assume that you did not actually do a “rollover” to an inherited IRA, but that it was done as a transfer where you did not have control of the funds when they were moved to an inherited IRA. You will have to take death RMDs each year and cannot defer or wait until you are age 70 ½ because you cannot make the inherited IRA your own IRA.

-By Joe Cicchinelli and Jared Trexler


Hello Ed,
My uncle passed away at the age of 83 years. His beneficiaries are his sister and brother (both are more than 70 yrs old) and residing in Pakistan. Would you guide me about the best possible way to get them money without paying a lot of taxes?.


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Thursday's Slott Report Mailbag

Consumers: Send in Your Questions to [email protected]

I transferred a stock from my IRA to my regular (non IRA account) and then transferred the exact same number of shares of the same stock back into my IRA within 60 days. However, the value of those shares was $10,000 higher.

Do I have a problem because I put more money into the IRA even though I transferred the same number of shares?


There is no problem. Your distribution of property (shares of stock) from your IRA qualifies to be rolled over tax-free within 60 days only if the identical stock is rolled over to a receiving IRA. It is common for the value of stock to change during the 60-day window. That’s OK and still qualifies as a tax-free rollover. When your tax return is filed for the year, your tax preparer may want to attach a note to explain the different values.