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Showing posts with label Roth IRA. Show all posts
Showing posts with label Roth IRA. Show all posts

Slott Report Mailbag: Can I Open and Convert a Non-Deductible IRA to a Roth IRA?

This week's Slott Report Mailbag includes information on opening non-deductible IRAs for the purpose of a backdoor Roth IRA, 401(k) beneficiary issues and if RMDs (required minimum distributions) can be converted to a Roth IRA.  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.


ed slott IRA questions
Send questions to [email protected]
Can a person over 50 years old, who has made $215,000 year-to-date in 2013, has already put $23,000 into a 401(k) plan in 2013, open a non-deductible IRA in 2013 and convert it to a Roth IRA? If so, how much can be put into the IRA? The person may not have earned income in 2014.


You are allowed to contribute $6,500 to an IRA if you have earned income this year and are age 50 or older. If you make a non-deductible IRA contribution, that amount can be converted to a Roth IRA tax-free as long as you have no other IRAs, including SIMPLE or SEP IRAs. All distributions and conversions from IRAs must use the pro-rata rule. The calculation is done on IRS Form 8606, which is filed with your tax return.


If there is no beneficiary listed on a 401(k) who does the account default to when the person passes away?

You have to check the 401(k) document to see who the default beneficiary is in this case. However, if the deceased 401(k) participant was married, federal law (ERISA) generally requires the surviving spouse to be the beneficiary.


Hi Staff-

Can IRA RMDs (required minimum distributions) be converted into Roth IRAs? Also, can IRA distributions, in excess of RMDs, be converted into Roth IRAs?


H Gomez

IRA RMDs cannot be converted to a Roth IRA, even though the RMD is taxable. However, after having first received your IRA RMD, any amounts above that amount can be converted. The conversion will be taxable to you.

- By Joe Cicchinelli and Jared Trexler

Roth IRA 5-Year Rules, Same-Sex Marriage Retirement Plan Guidance, Paying for a 2010 Roth Conversion

ed slott IRA information
The Roth IRA 5-year rules. The Department of Labor's recent guidance on how to treat same-sex marriage for employer retirement plans. Ways you could STILL be paying for a 2010 Roth IRA conversion.

Last week, America's IRA Experts descended on San Diego, California for our 2-Day IRA Workshop, Instant IRA Success. While we were in San Diego, we took the time to record some interactive, informational roundtables from the 30th floor overlooking the bay at the beautiful Grand Manchester Hyatt.

Below are 3 videos with our IRA Technical Experts and Slott Report staff writers. Enjoy this look at just a touch of the information covered over 2 days in San Diego. And if you are looking to gain a step on the competition and take your education to the next level, join us for our next 2-Day IRA Workshop in New Orleans on January 30-31, 2014.

And make sure to enter the Optional Registration Code "EARLY BIRD" to Save $500 off the full price.




Roth IRA 60-Day Rollover Rules

Many times we get the question “Do the 60-day rollover rules apply to Roth IRAs?” The answer is, yes.

roth IRA 60-day rollover rulesWhen a distribution from a Roth IRA is made payable to the Roth account owner, the owner has 60 days from the date he receives the funds to roll the funds over to another Roth IRA. This type of rollover can only be done once every 12 months. No other rollovers can be done out of either the distributing Roth IRA or the
receiving Roth IRA. Funds can still be rolled into those accounts though.

But, funds are not locked in those accounts for a year. Even though you cannot do another rollover you can still do a direct transfer of any of the funds in either Roth account to another Roth IRA. A Roth recharacterization can also be done from either account because it must be done as a direct transfer.

A rollover from a Roth 401(k) (or similar employer Roth plan) does not count. If the check from the employer is made payable to the plan participant, the 60-day rollover period does still apply but there is no once-per-12-month limit.

Funds that are not eligible for rollover, but are nevertheless rolled over, become excess contributions in the receiving account. Excess contributions are subject to a penalty of 6% per year for every year they remain in the account. The penalty is reported on Form 5329, which is filed with the account owner’s federal income tax return. If the form is not filed, the statute of limitations does not start to run on the penalty.

All of the above limits and potential problems can be eliminated by doing direct transfers. Instead of having a check made out to the individual, it should be made out to the receiving institution for benefit of the individual’s Roth IRA account. Then there is no 60 days to worry about, no once-per-year rule, and no worries about excess contributions.

IRS can allow extra time to complete a rollover in limited situations. The catch - the fees you have to pay. The extension can only be granted by requesting a private letter ruling. The IRS fees range from $500 to $3,000 depending on the amount of the rollover. In addition, you have to pay someone to prepare the ruling request. There is no guarantee that IRS will grant any request. If the request is denied, there are no refunds.

- By Beverly DeVeny and Jared Trexler

Slott Report Mailbag: Can I Contribute to a Roth IRA AFTER a Backdoor Roth IRA Conversion?

Roth IRA conversion questionThis week's Slott Report Mailbag comes to you from the Manchester Grand Hyatt in San Diego, California and Ed Slott's 2-Day IRA Workshop, Instant IRA Success. We answer questions on Roth IRA contributions and more - and as always, we suggest you work with a competent, educated financial advisor who can steer you to a safe, secure retirement.


If a person does a backdoor Roth IRA conversion, can he or she contribute to it thereafter?

Yes, as long as you qualify to make a tax-year Roth IRA contribution. For example, you would need to have compensation and income below certain levels to be able to make a tax-year Roth IRA contribution of $5,500 for 2013 (or $6,500 if age 50 or older).



I'm hoping you can help me with this question, and your website is very good and worth joining in my opinion.

I have an acquaintance through a catholic non-profit organization, who is a sister in the convent. Before she became a sister, she worked for a corporation and has an IRA account as the result of a 401(k) plan rollover. She is approaching age 70 ½ and will need to take an RMD (required minimum distribution). The problem is that any income received by any of the sisters in the convent could conceivably harm their non-profit status.

Can you tell me if you have had any experience with this situation, and is there a workaround that you may be aware of?

Thank you for your help!

She may want to consider doing a direct IRA distribution of up to $100,000 to a qualified charity (known as a qualified charitable distribution or QCD). The amount will be tax-free to the IRA owner. This provision is only available to those age 70 ½ or older at the time of the distribution and is set to expire at the end of this year. Other than this provision, IRAs cannot be gifted or assigned during the lifetime of the account owner. Such a transfer would be taxable to the account owner and the recipient would not have a tax-deferred account.



When my daughter converts my wife and my IRAs to inherited IRAs after we die, is she required to begin RMDs as soon as she converts them or can she wait until age 70 ½? Also, is she required to make RMDs on her inherited Roth IRAs?


Assuming your daughter wants to have a stretch IRA, when inherited IRAs are created after your death, RMDs will have to be taken beginning the year after your death. This is true for both traditional and Roth IRAs.

- By Joe Cicchinelli, Beverly DeVeny and Jared Trexler

You Don't Have to Keep Your SEP IRA Funds in a SEParate IRA

A SEP, or Simplified Employee Pension Plan, is an IRA-based employer retirement plan that’s very similar to a profit sharing plan. All SEP contributions are made by your employer. The employer decides how much to contribute for the year, anywhere from 0% to 25% of an eligible employee’s compensation with a maximum of $51,000 for 2013. After your employer decides how much to contribute, that contribution will be deposited into your IRA. Note that SEP contributions can never be made into your Roth IRA or your SIMPLE IRA.

From the IRS’ standpoint, it doesn’t matter if your SEP contribution for the year is put into your Traditional IRA or your SEP IRA. That’s because SEP money is treated like your other IRA money with regards to how it’s taxed, the IRA rollover rules, and the required minimum distribution (RMD) rules at age 70 ½ and later. So, if you want to have your SEP contribution deposited into your existing Traditional IRA, that’s fine as far as the IRS is concerned. Your SEP funds don’t have to be kept in a separate IRA. However, your financial institution may want you to keep them separate.

If the IRA only contains SEP funds, it’s often called a SEP IRA. For tax purposes though, all of your Traditional IRAs, including your SEP IRAs, are treated as one IRA. Therefore, there’s no tax advantage to keeping SEP funds in a SEP IRA. So if you ever want to move or combine your SEP IRA money with your Traditional IRA money via a rollover or transfer, that’s allowed. While some institutions won’t allow you to combine SEP funds with other IRA funds, you could simply roll over or transfer your SEP funds to a Traditional IRA with a different institution that does allow it.

- By Joe Cicchinelli and Jared Trexler

A Medicaid and Roth IRA Planning Horror Story

An attorney's client has a couple of small IRA accounts. He is not currently working. There is a possibility that he may need to qualify for Medicaid in the future. He has a large amount of cash just lying around. The attorney's idea? Just tuck the cash into a Roth IRA. After all, it is after-tax money so what's the problem?

medicaid Roth IRA planningWell, there are several problems. First of all, there are the Roth IRA contribution rules. You must have some sort of compensation, like earned income, and your modified adjusted gross income (MAGI) must be below a certain threshold. This client is not working. If his spouse is employed, he could use his spouse’s earnings to make his Roth contribution, assuming their combined income is below the applicable MAGI threshold. The next problem - you can only contribute $5,500 in 2013 to a Roth IRA (if you are age 50 or older during the year, you can contribution an extra $1,000 for a total of $6,500).

Suppose he makes the contribution anyway. Then what? The problems continue. Our client now has an excess contribution in the Roth IRA. Excess contributions are subject to a penalty of 6% per year for every year that they remain in the Roth IRA. This penalty is reported on IRS Form 5329, which is required to be filed with the client’s tax return each year.

Suppose he does not file this return. Then what? Again, the problems continue. There is a signature line on Form 5329. It is considered a separate tax return. If you don’t file a tax return, then there can be failure to file penalties for each year you do not file. And, if the unpaid penalty is large enough, our client could be subject to accuracy related penalties.

Finally, if our client does not file Form 5329, the statute of limitations does not start to run on all of these penalties. IRS can assess them at any time - along with interest.

Bottom line…You need to know the rules for retirement accounts before you make your contributions. IRS Publication 590, Individual Retirement Arrangements (IRAs), is a good place to start. If something goes wrong, it is not the advisor who will be responsible for taxes, penalties and interest. It will be you, the client.

- By Beverly DeVeny and Jared Trexler

Think You Are Done Paying For Your 2010 Roth IRA Conversion? Think Again.

2010 roth conversion taxesThere were two key tax law changes in 2010 that encouraged people to convert their existing retirement accounts to Roth IRAs.

First, the restrictions that previously prevented Roth IRA conversions for those with high incomes or those filing married-separate returns were eliminated. This opened the Roth conversion door for millions of Americans who previously did not qualify to do conversions. Second, 2010 Roth IRA conversions were given special tax treatment. Instead of having conversion income included entirely in 2010 as would typically be the case, 2010 Roth IRA converters were able to split the income from their conversions equally over 2011 and 2012.

That being the case, many of those converters believe they have seen the end of the cost of their 2010 conversions, but that may not be so. There are two key ways in which you may still be affected by your 2010 Roth conversion.

One possibility is that you may be paying 2013 estimated tax payments that are artificially inflated. Here’s why… There are two safe harbor methods for paying estimated taxes that will definitely keep you from owing estimated tax penalties. One way is to pay in 90% of your current year tax liability through quarterly payments. While this is a perfectly acceptable method, it’s not as foolproof as its counterpart, because your current year tax liability isn’t known for sure until after the year is already over. The other safe harbor method requires you to pay in 100% of your previous year’s tax liability (110% for certain high-income filers) through quarterly installments. This is generally the preferred method because by the time your first estimated tax payment for the year is due (April 15th), you typically know, or at least have a pretty good idea, what your total tax bill was for the previous year.

Suppose however, that you made a large Roth conversion in 2010 - say $600,000 - and you split that income equally, $300,000 per year, over 2011 and 2012. If that’s the case, and you’re paying 2013 estimated taxes based on 2012’s tax liability (the generally preferable way), your 2013 estimated taxes will be artificially high, since 2013 won’t have any of that Roth conversion income. Overpaying your estimated taxes doesn’t technically hurt you, since you will get any overpayment back when you file your 2013 tax return, but giving an interest-free loan to the government isn’t exactly on the top of most people’s priority list.

Another way in which you may still be paying for a 2010 Roth conversion is if you are a Medicare participant. Medicare Part B premiums are income-based, so an increase in your income can increase your premiums. Here’s the thing though… the premiums are generally based on your income from your tax return of two years prior. That means that your 2014 Medicare Part B premiums will likely be based on your 2012 tax return. If that return includes Roth conversion income from 2010, your premiums might be higher than they otherwise would be based on your “real” income. Thankfully, however, those Part B premiums should drop back down in 2015, when they will generally be based on your 2013 tax return, which won’t have any 2010 Roth conversion income reported on it.

Then… maybe… finally… you might truly be done paying for your 2010 Roth IRA conversion.

- By Jeffrey Levine and Jared Trexler

When You Should Leave Your Employer Retirement Plan Money In The Plan

employer retirement plan creditor protectionWhen you are entitled to receive withdrawals from your employer's retirement plan, such as a 401(k), a rollover to an IRA is a smart move in most cases. But there are some times when it’s best to leave the money in the employer plan and NOT do a rollover to an IRA.

One of the main reasons to leave your retirement funds in your employer’s plan is if you are worried about lawsuits. (Note: The employer’s plan must have employees, not be a single participant plan.) For example, maybe you are a physician who is concerned about malpractice liability. Or perhaps you’re a business owner such as a contractor who is worried that you may be sued at some point and you want to protect your employer retirement funds from creditors. The good news is that those assets in your employer’s retirement plan are protected from creditors by federal law.

Leaving your funds in your employer plan will give you the most protection from creditors including bankruptcy. But, if you roll over those funds to an IRA, a problem might arise. IRAs are not protected by federal law, except in bankruptcy (up to $1 million). Whether IRAs are protected from your creditors is based on state law.

Some states protect IRAs but that protection varies from state to state. Also, the protection, if any, could be different for Roth IRAs than that afforded to Traditional IRAs. It might pay you to find out from an attorney what, if any protection, your state has for IRAs before you do an IRA rollover from your employer’s plan.

Aside from protecting your employer plan funds from creditors, there are some distinct disadvantages to leaving your money inside the plan. The investment choices inside your employer plan are limited whereas you have virtually an unlimited choice of IRA investments. Also, it is easier to work with a financial adviser and get personalized advice when retirement funds are in your IRA versus your employer plan.

- By Joe Cicchinelli and Jared Trexler

Distributions From a Roth IRA Conversion

Roth IRA conversion distributionSuppose you are one of the many retirement account owners who converted funds to a Roth IRA in 2010 when there was a special 2-year “deal” on paying the taxes. Now you are wondering when you can take a distribution of those funds. The simple answer is that you can always take a distribution of your converted funds. However, depending on what you withdraw, you may not be happy with the tax consequences. Here are the rules.

First of all, all of your Roth IRAs are considered one, big, giant Roth IRA for distribution purposes. Your Roth funds are divided into three “pots” for distribution purposes.

The first pot of Roth funds that you empty are your annual contributions. You can take these funds out at any time and at any age, tax and penalty-free. Any distribution you take from any Roth IRA will be considered to be your contributions until they are gone.

The next pot you empty are your conversions. They are distributed on a first in, first out basis. Your conversions will be always be distributed income tax free. However, if you are either under age 59 ½ and the conversion you are withdrawing from was done less than 5 years ago, the distribution will be subject to the 10% early distribution penalty - unless an exception to the penalty applies.

The last pot of Roth money you empty will be your earnings. Distributions of earnings can be subject to both income tax and the 10% early distribution penalty. To have a tax-free distribution of earnings, you must have established your first Roth IRA account more than 5 years ago AND the distribution must be made after you are either age 59 ½, or due to your death, disability, or the distribution is for the first-time purchase of a home (lifetime cap of $10,000 per person). If you don’t meet those criteria, your distribution will be taxable. If you are under age 59 ½ at the time of the distribution, it will also be subject to the 10% early distribution penalty unless an exception applies.

Now that you know the rules, can you take a distribution from your 2010 Roth conversion? Assuming that is the only Roth IRA you have, yes you can take a distribution from your 2010 conversion. If you are under the age of 59 ½, you will owe the 10% early distribution penalty on any part of the distribution that was taxable at the time of the conversion.

Need help with this or any other IRA question? You can find an Ed Slott-trained advisor in your area on our website, www.irahelp.com.

 - By Beverly DeVeny and Jared Trexler

Slott Report Mailbag: Is a Conversion From an IRA to a Roth IRA Subject to the 10% Penalty?

This week's Slott Report Mailbag looks at the 10% early distribution penalty, which is in affect before age 59 1/2 in many cases. We also answer a tricky question about Roth recharacterizations. 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.



IRAs ed slott
Send questions to [email protected]
My daughter is 47 years old. She wants to convert funds from her traditional IRA to fund her Roth IRA each year. Even though she is not age 59 ½, can she move these funds without the 10% penalty since the funds are moving from one IRA to another?


Scott Wheeler

A conversion from an IRA to a Roth IRA is taxable, but not subject to the 10% early distribution penalty.


I have always considered my contributions to my Roth IRA as part of my emergency fund, knowing I could take the contributions (but not the earnings) before I reach age 59 ½ with no penalty. I also contribute to a traditional IRA. There was one year when my income unexpectedly jumped up above the level allowed for a tax-deductible IRA, but I didn’t realize I wasn't eligible until months after I made my contribution. Come April when I did my taxes I had this contribution re-characterized as a Roth IRA and paid taxes on it. My question is this: can the money I re-characterized be included as the portion of my Roth IRA, which can be taken out before 59 1/2 without penalty?

Yes. Your recharacterized IRA contribution is treated as a Roth IRA contribution that can be withdrawn tax-and-penalty free at any time.


I made three conversions in 2010. I know that I will be able to make qualified withdrawals on January 2, 2015. I also made a conversion on 1/3/2012. Must this conversion be governed by its own 5-year rule, meaning, qualified withdrawals will begin on 1/3/2017?


Assuming you are now age 59 ½ or older, there is no separate 5-year clock for purposes of the 10% penalty on the 2012 conversion because that penalty doesn’t apply any longer. But, if you’re under age 59 ½, the 2012 has its own separate 5-year clock with respect to the 10% penalty. With respect to a qualified withdrawal of interest, there is only one 5-year clock that expires on 1-1-15. All of your future Roth IRA withdrawals will be qualified (tax-free) from then on.

- By Joe Cicchinelli and Jared Trexler

IRAtv: How Financial Advisors Are Educating Their Clients

ed slott IRA informationIn today's fragile economic landscape, financial education is crucial. It's paramount that consumers are working with educated financial advisors to steer them through a complex tax code wrought with potential pitfalls and penalties.

That is the essence of Ed Slott and Company's mission, and our YouTube page, IRAtv, is another extension serving that clear goal: matching consumers with competent, educated financial advisors.

Below are several videos detailing how some of our financial advisors are best serving their clients and centers of professional influence (CPAs, estate planning attorneys, etc.) Those familiar with our video presence will also notice a new polished look at IRAtv - one that we will carry out into our future service of educating the public and the advisors they work with each day on IRAs, tax and retirement planning.

If you subscribe to our email feed and can't view the videos below, click here to land on IRAtv's homepage and search under "recent uploads" to watch 100 informative videos.

Inheriting More Than One IRA: What You Can and Can't Do

What happens when you or your client inherits more than one IRA? Can they be combined into one account? Do you have to take required minimum distributions (RMDs) from each account separately or can the distributions be aggregated?

inherited IRAThe answer will depend on who the inherited account came from as well as what type of account it is.

You can only combine accounts that are inherited from the same person. If you inherited three IRAs from Dad, you can combine them into one inherited IRA. If you later inherit an IRA from Mom who had inherited it from Dad, this IRA comes from Mom, not Dad. It cannot be combined with those IRAs inherited directly from Dad. The main reason for this is that the RMDs on the inherited accounts will be calculated differently. RMDs on accounts that are inherited directly are generally based on the beneficiary’s age in the year after the account owner’s death.

If you keep those three IRAs inherited from Dad as three separate IRA accounts, you must calculate an RMD on each account. Those RMDs can then be added together and taken from any one or any combination of the three IRAs inherited from Dad. An RMD for an IRA inherited from Dad cannot be taken from an IRA inherited from any other person.

You can never combine inherited retirement accounts of different types. You cannot combine an inherited traditional IRA with an inherited Roth IRA. You cannot combine an inherited 403(b) with an inherited IRA - except when you are doing a direct transfer of the inherited plan funds out of the plan into a properly titled inherited IRA. In that case, you can move the inherited employer plan funds (401(k), 403(b), etc.) into an existing IRA inherited from the same person.

You also cannot take RMDs for one type of inherited account from another type of inherited account. The inherited 403(b) RMD cannot be satisfied with a distribution from an inherited IRA. Generally, RMDs from employer plans must be taken from each employer plan separately. There is an exception for 403(b) plans. They can be combined just as the inherited IRA distributions can be combined as described above.

It is all too easy to lose an inherited retirement account because of a simple mistake. Beneficiaries should consider consulting with an expert in this area in order to preserve their inheritance for as long as possible. You can find a listing of Ed Slott-trained advisors on our website, www.irahelp.com.

- By Beverly DeVeny and Jared Trexler

Slott Report Mailbag: Going Back to the IRA Basics

It's fitting and all. School is in session or about to begin for many, so this week's Slott Report Mailbag provides the syllabus for IRAs 101, answering consumer questions on some of the IRA nuts-and-bolts you and your financial team must know to properly open, manage and distribute from an IRA. 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]
1. Can I contribute to an IRA or Roth IRA on behalf of my spouse who does not work or who makes less than the contribution limits?

Yes, you can contribute on behalf of a non-working spouse. The contribution rules are the same for the non-working spouse as they are for the working spouse. You must have earned income in order to make a contribution. The safe harbor definition of earned income is W-2 income. You can contribute the amount of your earned income or the contribution limit, whichever is less. Any taxpayer with earned income can make an IRA contribution with the following two exceptions. If you are age 70 ½ or older during the year, you cannot make a traditional IRA contribution. If your income exceeds certain limits you will not be able to make a Roth IRA contribution. The income limits will increase each year for inflation. See IRS Publication 590 for the current contribution and income limits (you could also visit www.IRAhelp.com/2013). If you are age 50 or over you are eligible to make an additional catch-up contribution in the amount of $1,000.

2. Do I have to take distributions from my traditional IRA?

YES. An IRA, SEP or SIMPLE owner must begin taking distributions in the year they turn age 70 ½. It does not matter if you are still working or if you do not want to touch the money, you still must take a required distribution. Your IRA custodian is required to notify IRS that you have to take a distribution, but they are not required to tell IRS how much you should withdraw. The custodian is required to tell you how much you should withdraw or they must offer to do the calculation for you. You will get that letter from your IRA custodian in January each year.

A non-spouse IRA beneficiary who is named on the beneficiary form (not one who inherits through the estate) must generally begin taking distributions in the year after the IRA owner’s death although some beneficiaries may have only 5 years to distribute the entire IRA. A spouse beneficiary (one who does not move the IRA funds into an IRA in their own name) does not have to start taking distributions until the IRA owner would have been age 70 ½. However, an IRA custodian can limit the distribution options for a beneficiary. You should check the IRA agreement for each account you inherit to see what your distribution options are for that account. A non-person beneficiary (estate, charity, etc.) and a trust beneficiary have special distribution rules. See IRS Publication 590 or the IRA account agreement form for more information on the distribution rules for beneficiaries.

Any required distribution that is not taken is subject to a 50% penalty of the amount not taken and is reported on IRS Form 5498 for the year the distribution was missed.

3. Can I name a trust as the beneficiary of my IRA or Roth IRA?

Yes, you can name a trust as the beneficiary of your IRA or Roth IRA. BUT, do not do this unless you understand all of the ramifications of having a trust instead of an individual inheriting the IRA. Always consult with an IRA expert advisor before taking this step. NEVER, NEVER, NEVER move your IRA assets into the trust or re-title your IRA into the name of the trust. Both of those actions are taxable events and you will owe income tax on the entire balance in your IRA, and you will no longer have an IRA!! The trust should simply be named as the beneficiary on the beneficiary form.

4. I just inherited an IRA or Roth IRA from my spouse. What do I do now?

Under the tax code you have three options, but your IRA custodian may limit these options. You will need to check with the custodian to see what your options are.

1. You can leave the IRA where it is and remain a beneficiary. This is generally not recommended. When you start taking distributions, they will be accelerated and your beneficiaries may not be able to stretch distributions over their lives when they inherit from you. However, it could be beneficial for a younger spouse who will need funds from the IRA to live on before attaining age 59 ½. Distributions from the inherited IRA will not be subject to the 10% early distribution penalty. Required distributions will begin in the year the account owner (not you) would have attained age 70 ½ or in the year after death if the owner was already 70 ½.

2. You can leave the IRA where it is and have it retitled in your own name and social security number. Some IRA custodians may not allow you to do this, but it is a simple way for you to get the IRA in your own name. The account is treated as if it had always been yours and distributions to you will begin when you turn age 70 ½ or in the year after death of the account owner if you are already age 70 ½.

3. You can move the funds to an IRA in your own name. This can be either a new account or an IRA that you already had in your name. If you are under the age of 59 ½, any funds you take out of an account you own will be subject to the 10% early distribution penalty. The account is treated as if it had always been yours and distributions to you will begin when you turn age 70 ½ or in the year after death of the account owner if you are already 70 ½.

Whatever option you use, always be sure to name your own beneficiaries on the account you have inherited. Any required distributions that are missed will be subject to the 50% penalty and are reported on IRS Form 5498 for the year the distribution was missed.

- By Joe Cicchinelli and Jared Trexler

Slott Report Mailbag: How Do I Name a Properly Titled Inherited? IRA?

This week's Slott Report Mailbag looks at the once-per-year rollover rules, touches on how to name a properly titled inherited IRA and once again dissects the always-confusing Roth IRA 5-year rules. 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.


ed slott IRA questions
Send questions to [email protected]
Is there a rule that says the holder of an IRA-CD can get the higher interest rate at a bank once in a calendar year, even if the CD is for a longer term? Can banks have differing rules on charging for RMD withdrawals from IRA-CD's?

S. Vogel

There is no IRS rule that governs when you can get a higher CD rate. Check your CD documents to see if you’re entitled to transfer your IRA funds to a higher paying CD. Banks can charge fees and/or CD penalties for RMD withdrawals, but those fees and penalties must be disclosed to you. Fees can be different among banks. What you, as the IRA account owner, have to be careful of are the 60-day rollover rules. A rollover is when a distribution from an IRA is made payable to you and you then take the funds and put them back into an IRA. You can only do this type of transaction once every 12 months on the same funds. If you have any questions on this, you need to consult with an advisor who specializes in the IRA rules. This is not necessarily the person you talk to at the bank. For a list of Ed Slott trained advisors, go to our website: www.irahelp.com.


I am confused about the naming of a stretch IRA. Per your book, you indicate an IRA inherited by child must be named "John Smith, IRA (deceased 10/27/11) FBO John Smith, Jr., beneficiary". My IRA is currently named "Company A custodian FBO John Smith IRA". How would this be renamed?

There is some leeway on how a properly tiled inherited IRA is titled. The title must have the name of the beneficiary and the deceased IRA owner, and use the social security number of the beneficiary. For example, another correct inherited IRA title could be “John Smith, Jr. as beneficiary of John Smith, IRA.”



I was hoping you could clarify a question I have regarding the 5-year window for converted Roth IRA funds.

Is it accurate that if the first year IRA contribution was made more than 5 years ago and the investor is over 59.5 that the 5-year window for each conversion really no longer applies?

I thought that each conversion had its own 5-year window, but I just read that if the Roth had been initially funded over 5 years ago and the account owner is over 59.5 that it really doesn't matter.

Thank you,


The answer to both of these questions is the same. The 5-year rule for conversions has to do with the 10% early distribution penalty. If the account owner is age 59 ½ or older now, there is no 10% penalty on a distribution of a converted amount. When the account owner is under age 59 ½ and takes a distribution of a converted amount within the first 5 years, the 10% early distribution penalty will apply.

The other 5-year rule applies to a qualified distribution. Once you have qualified distributions, there are no taxes or penalties on any amounts withdrawn. To be qualified, a distribution must be:

taken 5 years after your first Roth IRA is established
after attaining age 59 ½; OR
after your death, disability, or for a first time home purchase.

- By Joe Cicchinelli and Jared Trexler

You CAN'T Change Your Mind on a Roth 401(k) Conversion

While many of us know that you can convert an IRA to a Roth IRA, a process that’s not as well understood is a Roth 401(k) conversion. If you participate in a 401(k) at work, you can convert your existing plan assets to a Roth account inside the 401(k) plan. This option is known as an “in-plan conversion.” But check with your employer first because although the law allows an in-plan conversion, your plan may not have this option.

roth 401(k) conversionThe in-plan conversion rules also apply to 403(b) plans, governmental section 457(b) plans, and the thrift savings plan of the federal government. The Roth account inside your 401(k) plan is called a designated Roth account in the tax code. The in-plan Roth conversion will be taxable to you, but the funds inside the Roth account will grow tax-free if certain rules are followed.

Previously, you had to be eligible to get a distribution from your 401(k) plan to do an in-plan conversion. However, that rule changed this year. Beginning in 2013, you’re now allowed to do an in-plan conversion even if you’re not yet eligible to take a distribution from your 401(k).

The major problem with an in-plan Roth conversion is that once you do it, there’s no turning back. By contrast, if you convert IRA money to a Roth IRA, the law allows you to change your mind, or reverse it. The IRS calls this a “recharacterization.”

Unfortunately, the rules don’t allow you to undo (“recharacterize”) an in-plan Roth conversion, so make sure it’s the right move before you do it. As we said earlier, because an in-plan conversion will be taxable to you, you’d better be sure you’ll have the money to pay the taxes you’ll owe. Also, if, after an in-plan conversion, the value of that Roth account drops due to poor investment performance, you’ll still owe taxes on the value of the assets converted as of the date of the in-plan conversion.

- By Joe Cicchinelli and Jared Trexler

IRA Contributions When You Contribute to an Employer Retirement Plan

I am maxing out my 401(k) or I am contributing to a 401(k), can I also make an IRA contribution? We get asked that question a lot.

The answer is, YES. But, you may not be able to deduct your IRA contribution.

IRA contributions employer retirement planFirst, let's talk about the contribution. Participation in any employer retirement plan, including IRA based SEP and SIMPLE plans, does NOT impact your ability to make an IRA or a Roth IRA contribution. The only qualification is that your earned income must equal or exceed the amount you contribute. You can make a contribution for yourself and for a non-working or lower wage earning spouse as long as you file your income tax return as married filing jointly.

For 2013, the contribution limits are $5,500 per person, and if you are age 50 or older during the year, you can contribute an extra $1,000 for a total of $6,500 per person. You cannot contribute $5,500 to an IRA and $5,500 to a Roth IRA. The maximum you can contribute is $5,500, which can be split between an IRA and a Roth IRA if you wish.

Now let’s talk about deducting your IRA contribution. If you are covered by an employer plan and file your tax return as married filing jointly, for 2013, your ability to deduct your IRA contribution phases out when your adjusted gross income is between $95,000 and $115,000. If you are filing your return as single, the phase-out range is $59,000 to $69,000. If you are not covered by a company plan but your spouse is covered, the phase-out range for you is $178,000 to $188,000. If you file married-separate, your phase-out range is $0 to $10,000.

If you cannot deduct your contribution and you decide to make the contribution to a Roth IRA instead, you have a different set of rules. If your income is too high, you cannot make a Roth IRA contribution. For 2013, when you are married filing jointly, the phase-out range for making a Roth contribution is $178,000 to $188,000. If you are single, the phase-out range is $112,000 to $127,000, and if you are married filing separate, the phase-out range is $0 to $10,000.

As with most IRA rules, what seems simple has its complications. For an Ed Slott-trained advisor, please go to our website: www.irahelp.com. Don’t be a do-it-yourselfer. Mistakes made in IRAs can be very costly.

- By Beverly DeVeny and Jared Trexler

"How is My Annuity Going to Be Taxed?"

“How is my annuity going to be taxed?” It’s a question that's asked frequently, but one that can have several different answers. That's because an annuity can be taxed differently depending on the type of annuity you are receiving distributions from, as well as the type of the account it's in.

annuity taxFirst, let's make sure that we understand annuities generally fall into one of two categories. Either they are in “deferred status” or they have been “annuitized.” With a deferred annuity, you generally still exercise some control over your investment. On the other hand, annuitization is generally an irrevocable election where you essentially turn your money over to an annuity carrier in exchange for a series of payments.

Distributions of deferred annuities (that have not been annuitized) held in non-qualified accounts are taxed on what is known as a LIFO, or last-in, first-out basis. This means that if you have any earnings in your annuity, they are the first dollars considered to be distributed and are taxable as ordinary income. Only after you have exhausted your earnings will you receive distributions of principal - your initial investment in the contract - back tax free.

Example: You purchase a deferred annuity for $100,000 and the value has now grown to $115,000. While still in deferred status, you take a $12,000 distribution. The entire distribution would be taxable as ordinary income because you have not yet exhausted your $15,000 of earnings. If, instead of taking $12,000 you took $18,000, you would have taxable income of $15,000 and a return of basis of $3,000.

Distributions of annuitized annuities purchased with after-tax funds are taxed a little bit differently. Instead of being taxed on a LIFO basis, a portion of principal is returned with distributions. If you’ve annuitized your IRA over a specific number of years (i.e., 20 years), your principal will be distributed to you evenly over those years. If, on the other hand, you’ve annuitized your annuity contract over one or more life expectancies, your principal will be returned to you over the predicted life expectancy. An annuity company will calculate this “exclusion ratio” for you and can tell you how much of your distributions will be taxable and how much will be tax free.

Example: You purchase an annuity for $100,000 that is annuitized over 20 years and guarantees annual payments of $6,500. Each year, $1,500 of your distribution will be tax free and $5,000 ($100,000/20 = $5,000) will be taxable.

What if, on the other hand, you purchase your annuity with traditional IRA or Roth IRA money? Well here’s where people get confused. For the most part, you can throw away everything above, because when an annuity is purchased with retirement account money, distributions from that investment follow the applicable rules for the specific retirement account.

For example, if you purchase an annuity with traditional IRA money and start taking distributions, for tax purposes, it really doesn’t matter whether it’s been annuitized or not. If those distribution checks are going straight to you (i.e., the money is no longer in an IRA), then the entire amount is generally taxable because IRAs are generally funded with pre-tax dollars.

Similarly, if you purchase an annuity in a Roth IRA and begin to take distributions, the tax impact will be determined based on the Roth IRA rules. So, for instance, if you are already age 59 ½ and have owned a Roth IRA for at least 5 years, any distributions from Roth IRA-owned annuities will be considered qualified distributions and will be completely tax free.

- By Jeff Levine and Jared Trexler

Slott Report Mailbag: What Part of My Lump Sum Distribution is an Eligible Rollover Distribution?

This week's Slott Report Mailbag looks at retirement plan distributions and moving money to tax-free territory. We dissect these two issues below, and remember, if you have a question make sure to email us at [email protected]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.


Enjoy your articles greatly.
IRA and retirement planning questions
Send questions to [email protected]

My question is, say I am 63, receiving Social Security and a pension. My wife is 5 years younger. We both had company 401(k)s.

When she retires, I figure her Social Security, 401(k) distributions and pension may throw us to the 25% tax bracket.

What I want to do is take $30,000 distributions from my 401(k), figuring to use about $10,000 of it. I want to throw the excess $20,000 into my existing Roth IRA so that I have some more tax-free income in the future when we may be at the 25% tax bracket.

Is this allowed and are there any limits?


Rich McBride

You can convert any amount of your 401(k) distribution to a Roth IRA. There are no dollar limits on the amount of money that can be converted to a Roth IRA nor are there any income limits that would prevent you from doing a conversion. The amount converted will be taxable. It is considered ordinary income and can push you into a higher tax bracket. It can also affect your deductions, credits, exemptions and phase-outs. If, after doing your tax return for 2013, you decide that the conversion is no longer what you want to do, you can undo (recharacterize) all or some of the converted amount up to October 15, 2014.


A pension plan participant has been receiving monthly payments during 2013.

The pension plan is terminating and the participant has been offered a lump-sum cash out option. She wishes to elect this option (with spousal consent) and roll the lump sum to an IRA (non-Roth).

Question: What portion of the lump sum is an eligible rollover distribution?
a. All but the full normally computed required minimum distribution?
b. (a) but reduced (not below $0) by the sum of the monthly pension payments received?
c. Other?

Question: Will the amount rolled over be subject to a second minimum required distribution in 2013?

Thank you.

The amount that’s eligible for rollover is the full amount minus any required minimum distribution (RMD) of the pension plan for 2013 that she hasn’t taken yet. Assuming she’s age 70 ½ or older this year, she doesn’t have to take a second RMD from the IRA on the pension rollover amount.

- By Joe Cicchinelli and Jared Trexler

Contributing to More Than One Retirement Plan for the Year

contribute to more than one retirement plan in one yearWhile many Americans aren't saving enough for retirement, there are others who are saving a lot (true story). In fact, some of you have asked whether it's possible to contribute to more than one retirement plan for the same year. The answer is generally yes, but there are certain traps you need to be aware of before jumping in to the savings game feet first.

If you are making an IRA contribution for 2013, the maximum contribution you can make is $5,500 (or $6,500 if you’re age 50 or older this year). This limit applies to both IRAs and Roth IRAs. Although you can contribute to both an IRA and Roth IRA, the combined limit is $5,500 or $6,500 depending on your age. You can’t contribute the maximum to both an IRA and a Roth IRA. For example, if you are age 50 or older this year, the maximum combined IRA and Roth IRA contribution you can make is $6,500. You could choose to make a $3,000 contribution to your IRA and the remaining $3,500 to a Roth IRA. As long as you don’t exceed your $6,500 limit, you can split the IRA contribution any way you want.

If you also participate in a retirement plan with your employer that allows you to make salary deferral contributions, you can do that in addition to your IRA contributions. For example, if you participate in your employer’s 401(k) plan for the year, the maximum amount you can defer is $17,500 if you are under age 50. If you’re age 50 or older, the maximum deferral is $5,500 more, for a total of $23,000 for the year. The IRS calls this the “annual deferral limit.” Note that your plan may set a lower dollar limit.

If you happen to participate in more than one employer retirement plan during the year, the annual limit must be combined for plans such as 401(k)s, SIMPLE IRAs, and 403(b)s. The annual limit applies no matter how many plans you participate in during the year. So, if you switched jobs during the year, and participated in more than one plan, you have to keep track of the annual deferral limit to make sure you don’t exceed the limit. If you do exceed the annual deferral limit, you will have to remove the excess and the interest it earned from the plan by April 15th to avoid tax problems.

-By Joe Cicchinelli and Jared Trexler

Slott Report Mailbag: Can IRA Distributions Make Me Susceptible to 3.8% Healthcare Surtax?

This week's Slott Report Mailbag looks into two tricky areas of IRA planning. The first is how IRA distributions affect an individual's income, and in turn, their susceptibility to the 3.8% health care surtax. We then answered a question about the equally problematic Roth IRA 5-year rules. We receive many questions on a process wrought with possible mistakes and penalties - so much so that we created an entire Roth IRA 5-Year Rules pamphlet! Do you know who knows all about the 5-year rules? An Ed Slott-trained advisor in your area.

On to the mailbag...

1. You recently said that a 401(k) distribution would add to your MAGI (modified adjusted gross income) for the purpose of determining if you are subject to the 3.8% healthcare surtax. What about Roth IRA distributions? Would they also count towards your total MAGI income for surtax purposes?
IRA, tax and retirement planning questions
Send your questions to [email protected]


IRA distributions are exempt from the 3.8% surtax, but taxable distributions from IRAs can push income over the threshold amount, causing other investment income to be subject to the surtax. Because Roth IRA distributions are generally tax-free, they don’t count towards your total MAGI.

2. I have a Roth IRA that is over 5 years old, and last December I converted my Traditional IRA into a Roth IRA (paying the income tax on the non-basis amount on my 2012 tax return), then combined it with my existing Roth IRA. First, was it okay to combine them, and secondly do I have to wait for 5 years until I can withdraw the amount I had converted?

It was okay to combine them. There are ordering rules for Roth distributions and all your Roth IRAs are considered one Roth IRA. Your contributed funds will be deemed to be the first amounts distributed. Then your conversion funds, first in, first out. If you are younger than age 59 ½ when you withdraw conversion funds within five years of the date of conversion, you’ll be assessed the 10% early distribution penalty on the amount that was taxable when you converted. The last funds out are earnings. To have a tax and penalty free distribution of earnings, the distribution must occur at least five years after the date you established your first Roth IRA and after you are age 59 ½ or dead, disabled, or for a first time home purchase.

3. We are looking to convert an IRA to a Roth IRA. We took a loss on a variable life policy that was converted to an annuity. Can we use that loss to offset the tax due on a Roth conversion?

The conversion of the IRA to a Roth IRA is treated as ordinary income on the tax return. You can only offset that income with deductions that will offset ordinary income. You should consult with your tax preparer to see if this particular loss qualifies to offset his ordinary income.

-By Joe Cicchinelli and Jared Trexler


Thursday's Slott Report Mailbag

Consumers: Send in Your Questions to [email protected]

You recently said that a 401(k) distribution would add to your MAGI (modified adjusted gross income) for the purpose of determining if you are subject to the 3.8% healthcare surtax. What about Roth IRA distributions? Would they also count towards your total MAGI income for surtax purposes?


IRA distributions are exempt from the 3.8% surtax, but taxable distributions from IRAs can push income over the threshold amount, causing other investment income to be subject to the surtax. Because Roth IRA distributions are generally tax-free, they don’t count towards your total MAGI.