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Showing posts with label money. Show all posts
Showing posts with label money. Show all posts

Taking Non-Cash Required Distributions from Your IRA

required distribution IRAWhen individuals take withdrawals from their IRAs, it's usually a cash withdrawal. By cash, we don't mean dollar bills; instead it's usually done by issuing a check. But it's possible to take a non-cash withdrawal from certain IRAs. These non-cash distributions are known as property distributions or “in-kind” distributions.

Some IRA distributions can be taken as non-cash (property) distributions. Let’s say you are age 70 ½ or older and have been taking required minimum distributions (RMDs) from your IRA for several years now. You have probably taken your RMDs in cash. You likely sold or liquidated an investment in your IRA, let’s say shares of stock, and had the custodian send you a check for the RMD amount. But you have another option; consider taking your RMD in a property distribution.

Assume you are age 75 and your RMD this year is $8,700. You could ask the custodian to distribute $8,700 worth of property to you from your IRA. This could be advantageous in some situations. For example, maybe your IRA is holding shares of a certain stock whose price has gone down quite a bit recently, but you think the stock price will rebound in the future. If you sell (liquidate) that stock inside your IRA and have the custodian send you a check for $8,700, you’ll never see that stock price rebound because neither you nor your IRA owns that stock anymore. Instead, you should consider having the custodian distribute $8,700 worth of that stock to you. The stock will be distributed out of the IRA in-kind (intact) to you and must be valued at its fair market value on the date of the distribution. You still own those shares and you can keep them in a non-IRA brokerage account. You have satisfied your RMD by taking an $8,700 property distribution. The custodian will send you a copy of IRS Form 1099-R showing that you took an $8,700 distribution, and you report that amount on your federal income tax return.

Don’t wait too late in the year to request your RMD be paid with a distribution of property. The custodian will need time to do a valuation of the asset, calculate how much of the property to distribute, and then make the actual distribution to you, which will involve changing the title of the asset to your name. Any RMD not timely paid out in the year in which it is due is subject to a penalty of 50% of the amount not taken. You could run into two problems if you wait too late in the year. One, the custodian may not complete the process in time or two, the value of the property on the actual date of distribution could be more or less than your RMD. The second problem can be corrected with a rollover of the excess property (not cash) or you can take a cash distribution to make up any shortfall.

- 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.

Advisor Perspective: Ed Slott's Elite IRA Advisor Group

Ed Slott's Elite IRA Advisor Group is a membership group of financial advisors who are committed to their IRA education and serving their clients' best financial and retirement planning interests. At our last workshop this May in Dallas, Texas, Ed Slott and Company IRA Technical Consultant Jeffrey Levine spent some time with several members to get their perspective on the educational expertise they receive and how it has elevated their standing in the industry and enhanced their business.

Below are two roundtable discussions with seven members of Ed Slott's Elite IRA Advisor Group: Jeffrey Cutter, Christian Koch, Suzanne Christian, Bill Jones, Stuart Kirsner, Jude Wilson and Micah Shilanski.

Advisor Perspective #1

Advisor Perspective #2

-Compiled by Jared Trexler; Edited by Scott Currie

Wedded Miss: How Changing Your Last Name Affects Moving Your Retirement Money

Tradition has it that when a man and a woman get married, the woman typically takes the last name of her husband. Although today, many choose to modify this tradition, perhaps by hyphenating their maiden name with their husband’s surname, or do away with it altogether and keep their own name, there are still many who keep this tradition alive.

changing last name affects moving retirement moneyOne potential consequence of changing your name is that moving your retirement money around might become a little more challenging. This has nothing to do with any tax code rules or other laws, but is simply a result of the policies many custodians have in place. When money is transferred from one IRA directly to another IRA in a trustee-to-trustee transfer, many custodians want to have everything "match-up" before they will accept the funds. That means that if you have your maiden name on an old IRA or plan account and your married name on the new one, the transfer might be blocked, at least temporarily, by one or both of the custodians.

So what can you do if such a situation presents itself? There are really three main options to choose from. The first option, and one we would NOT recommend, is taking a distribution from your old account payable to you, depositing it in your bank account and then writing a new check to your new custodian using your new name. This solution, however, is rife with potential problems.

For instance, if the distribution is coming from a plan, the plan might withhold 20% for taxes, which would have to be made up with personal funds in order to avoid the withheld amount from being subject to income tax and perhaps the 10% penalty. Plus, whether it’s coming from a plan or an IRA, you only get 60 days to complete this process. That may seem like a long enough time but there are hundreds of IRS private letter rulings asking for an extension of the 60 days that indicate otherwise.

Your second option, and a good one at that, is contacting the new custodian and letting them know about your situation. Ask them what policies, if any, they have in place for such a situation. Perhaps completing your transfer will be as simple as submitting a copy of your marriage license or court documents showing a change of name.

If for whatever reason your new custodian is hard to deal with on this issue, your third option is going back to the old custodian and trying to change your name there first. This way, when you initiate your transfer, your names will match. This option requires you to deal with the old custodian, from whom you are taking the funds, and oftentimes people prefer to avoid this option, if possible, for reasons of personal comfort.

Transferring funds between retirement accounts is but one of the many issues to consider after changing your name for one reason or another. Beneficiary forms, wills, trusts and any other important documents should also be updated. You often don't need any of these documents after a significant event or until something has gone wrong, and that seems like a bad time to have to start dealing with this.

-By Jeffrey Levine and Jared Trexler

Employer-Sponsored IRAs: A Retirement Plan with Unique Advantages

If a business owner is considering starting a retirement plan for himself and his employees, he may want to consider an employer-sponsored IRA. While employer-sponsored IRAs are not very well known, even to many tax pros and CPAs, they offer some unique advantages from other employer retirement plans.

Basically an employer-sponsored IRA is an arrangement where the employer makes an IRA contribution for his employees. The employer can choose to make that contribution into an IRA or Roth IRA. The employer can also choose the employees for which he or she wants to make that contribution. Unlike other employer retirement plans such as a 401(k), SEP, or SIMPLE, the employer has complete flexibility over which employees will receive an IRA contribution that year. The employer has complete discretion.

The employer would make the deposit into an IRA for each employee who is getting a contribution. All the IRA rules apply, such as the $5,500 limit for 2013 (or $6,500 if the employee is age 50 or older), the age 70 ½ rule for IRAs, and the income rules for Roth IRAs. For example, if your employer wants to make a Roth IRA contribution for you, your income (modified adjusted gross income) must be below $178,000 if you’re married filing jointly, or $112,000 if you’re single, to receive a full Roth IRA contribution.

Employer-sponsored IRA contributions are considered wages, so the contribution is taxable to you. If your employer makes an IRA contribution for you, they should tell you so that you don’t exceed the IRA limit for the year if you also plan on making an IRA contribution for yourself. If the employer contribution was made into an IRA, you might be eligible for a tax deduction. If the employer contribution is made into a Roth IRA, it can’t be deducted.

-By Joe Cicchinelli and Jared Trexler

Are You Owed a Federal Income Tax Refund?

IRS has announced that an estimated 984,400 taxpayers who did not file a 2009 income tax return are owed over $917 million in refunds.
federal income tax refund ed slott
In order to collect your refund, you must file your 2009 federal income tax return by April 15, 2013. The average refund owed is over $500.

The link to the IRS article is here: http://www.irs.gov/uac/Newsroom/IRS-Has-$917-Million-for-People-Who-Have-Not-Filed-a-2009-Income-Tax-Return. If you have to type it into your browser, it is case specific.

IRS goes on to say that many of the refunds are owed to individuals who did not have enough income to require them to file a return but they had taxes withheld from wages or paid in estimated payments. They need to file a return to receive their refund. If no return is filed, the money goes to the federal government. There is NO penalty for filing a late return when there is a refund due.

A word of caution, though. The refund may be held if returns are not filed for 2010 or 2011, or if there are offsets for items such as child support or student loans.

Article Highlights:
  • IRS is holding over $917 million in 2009 income tax refunds
  • A 2009 tax return must be filed to claim the refund by April 15, 2013
  • There is no penalty for filing a late return to claim a refund
- By Beverly DeVeny and Jared Trexler

Why Advisors Attend Ed Slott and Company's Instant IRA Success

Financial advisors are constantly looking for ways to improve their knowledge base and help their clients avoid needless taxation and pitfalls that frame so many financial horror stories!

Ed Slott and Company IRA Technical Consultant Jeffrey Levine sat down with eight attendees from Ed Slott and Company's 2-Day IRA Workshop, Instant IRA Success, to discuss what they learned from the program and why they decided to make the commitment to attend the workshop.

In this first video, we talked to Michael Fraher from Orlando, Florida, Brad Pistole from Ozark, Missouri, Chris Lacerenza from Cincinnati, Ohio and Christian Koch from Atlanta, Georgia.

In the second video below, we talked to Kevin Lee from Corvallis, Oregon, Andy Byron from Boise, Idaho, Larry Rosenthal from Manassas, Virginia and Craig McDaniel from Columbia, South Carolina.

Slott Report Mailbag: Can I Roll a Non-Governmental 457(b) Plan to an IRA?

This week's Slott Report Mailbag comes to you live from the Arizona Biltmore Resort and Spa and our Fall 2012 Master Elite and Elite IRA Advisor Group Workshop.  We answer questions about rolling before-tax and/or after-tax money to an IRA, non-governmental 457(b) plans and rolling money to an IRA during bankruptcy.  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, tax, retirement planning questions
Send your questions to [email protected]
I turned 70 1/2 this year and I am retiring before the end of the year. I understand I need to take my RMD (required minimum distribution) from my 401(k) before I can transfer it to an IRA. I have before-tax and after-tax money in my 401(k). If I move it to an IRA, can the after-tax money be moved to a Roth IRA instead of receiving a check for that amount? Thank you.

IRS Notice 2009-68 says that if a direct rollover of only part of your funds is made (and some is paid to you), each distribution includes a pro-rata amount of the after-tax funds. It appears that the only way you could rollover only the pre-tax funds to your IRA and only the after-tax money to your Roth IRA would be to have the entire amount paid to you (i.e., not choose a direct rollover) and use the 60-day rollover rule. You could then fund the IRA first and the Roth IRA last. However, the 20% withholding rules would apply to the pre-tax portion. You would have to be able to make up the withheld amount from other personal funds. Any overpayment of taxes would be refunded to you when you file your tax return. This is a controversial topic and tax advice is needed. Further IRS clarification is needed. Your RMD cannot be rolled over.


Can a non-governmental eligible 457(b) plan be rolled into an IRA? I've checked five different sources and three of them say "no" and two of them say "yes" it can.

Who’s right?


Only governmental 457(b) plans can be rolled over to an IRA. Non-governmental 457(b) plans cannot be rolled over to an IRA.



I am in the middle of a bankruptcy and my attorney told me I could legally put some money into an IRA to protect it. I have done some research and found that you can only deposit $5,000 a year into an IRA. I have more than that to work with. I need some help with this, and I hope you can help.

The annual IRA contribution limit is $5,000 (or $6,000 is you are age 50 or older this year). If you roll over employer retirement plan money to an IRA, those rollover funds will be protected in bankruptcy. Other funds cannot be put into an IRA.

- By Joe Cicchinelli and Jared Trexler

Slott Report Mailbag: IRA Rollovers and Non-Resident Beneficiaries

This week's Slott Report Mailbag shows that retirement planning involving IRAs can be complicated, and consumers just like you are confused about the rules and concerned they are making fatal, penalty-induced errors.  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.


Dear Mr. Slott,

Send questions to [email protected]
I am and have been an avid follower of your programs on public television and have purchased your books as well as CD/DVDs. I respect your opinion very much and badly need your help. I have been disabled since 2008 due to an aortic dissection and will be turning 65 in December 2012. In early March 2012, I converted my company 401(k) to a traditional IRA and a Roth IRA.

I had 3 components in my 401(k):
1) A pre-tax contribution component
2) A post-tax component and
3) A Roth 401(k) component

I did a direct rollover as you have always said in your books. However, I received three checks from my employer, two in the name of the institution where I was rolling over and one directly in my name. One was for the Roth 401(k) to a Roth IRA, the second was a pre-tax 401(k) rollover to an Traditional IRA and a third check, which I did not know what to do with, upon advise of my CPA put it into a regular bank account. This latter amount I was told was from the post-tax 401(k) contributions that I had made during my work life. I have 3 questions:

1) I was wondering why I could not put this into a Roth IRA since this was my after-tax contribution to my 401(k)?

2) Further, can I convert a part of my IRA to a Roth IRA this year so that I can take advantage of the lower tax bracket I belong to at present (25%)?

3) Can I put this money in the same Roth IRA that I already have or do I need to open a new Roth IRA account?

I thank you in advance for your help and truly appreciate the work that you do particularly for people like me. Please help.


Zerksis Boga

The after-tax amount could have been rolled over (converted to a Roth IRA). Because more than 60 days has passed since you received those funds, they cannot be put into an IRA. You can certainly convert part of your IRA to a Roth IRA at any time. You do not need to open a new Roth IRA to do so.


Your books about retirement planning are super helpful.


1. All of my beneficiaries are non-residents of the USA. What are the tax implications of this? Do all beneficiary rules apply to them or are they totally different? Or do they have to pay much higher tax? If so, what is my way out?

I am single and I do not have any family in the USA. All of my relatives are overseas.

2. Can I move my IRA account to institutions overseas?

Thank you in advance for your assistance.

Chin Liao

The taxation of a U.S. IRA to non-resident aliens is based on whether there is a tax treaty between the U.S. and that country. Also special income tax withholding rules apply. On the IRS website www.irs.gov, check Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, and Publication 901, U.S. Tax Treaties, to learn about the tax treaties and withholding rules. A U.S. custodian must maintain IRAs.

Article Highlights
  • You can convert part of your IRA to a Roth IRA at any time.
  • The taxation of a U.S. IRA to non-resident aliens is based on whether there is a tax treaty between the U.S. and that country
- By Joe Cicchinelli and Jared Trexler 

Recharacterize a 2011 IRA Contribution After October 15? Probably Not

Monday October 15, 2012 was the deadline to recharacterize an IRA contribution for 2011. Now that we are past that date, is it possible to get an extension for time to do a recharacterization? Probably not.

ed slott recharacterization deadlineWhen you recharacterize, you essentially change your IRA contribution from one type of IRA to another. In most cases, a recharacterization involves reversing a Roth IRA conversion. Some or all of the conversion can be recharacterized with its net income attributable (gains or losses). A recharacterization can be done for any reason but certain rules must be followed. For example, both the Roth and the traditional IRA custodians must be notified of the recharacterization in writing and the recharacterization must be done as a trustee-to-trustee transfer (a direct transfer, not a withdrawal from the Roth IRA and a subsequent deposit to an IRA).

Even though the 2011 recharacterization deadline has passed, it might be possible to get more time to recharacterize. The IRS can give you more time beyond the standard October 15 deadline to recharacterize when, based on the facts and circumstances, you acted reasonably and in good faith. The IRS gives the extra time through a private letter ruling (PLR) request. In most of these PLRs, the taxpayers determined, after the October 15th deadline, that their conversions were not allowed because their income exceeded the $100,000 limit in years before 2010. However, the IRS fee for a Roth recharacterization is $4,000, not including professional fees to prepare a PLR request, which can run an additional $5,000 to $10,000.

From a practical standpoint, unless you can convince the IRS that you have an extenuating circumstance that warrants more to time to recharacterize and you can pay the $4,000 IRS fee plus the tax pro’s fee, you won’t get more time to recharacterize.

Article Highlights
  • The 2011 recharacterization deadline was October 15, 2012
  • IRS sometimes will give you more time to do a recharacterization
  • The IRS fee for a later recharacterization request (PLR) is $4,000 
- By Joe Cicchinelli and Jared Trexler

SIMPLE IRA Plans Require Notification by November 1

ed slott SIMPLE IRA notificationA "Savings Incentive Match Plan for Employees" (SIMPLE), is a retirement plan for small businesses that uses a special IRA (called a SIMPLE IRA) as the funding vehicle. November 1, 2012 is the deadline for employers who are continuing to offer a SIMPLE IRA plan for next year to send you a notification.

Your employer must notify you 61 days before the beginning of next year (i.e., by November 1) of your eligibility to make voluntary salary deferral contributions or to change the amount you’ve previously been contributing. Your employer could give you more time, for example by giving you a 90-day election period. This notice also tells you if you can choose your own financial institution for your SIMPLE IRA or whether you must use one that is chosen by your employer, which is called a designated financial institution.

The employer notice also tells you the plan’s contribution formula that will be used for next year. Your employer must choose either a matching or 2% fixed contribution formula for the year. An employer matching contribution is given to you only if you’re actually contributing to the plan, whereas a 2% fixed contribution is given to you as long as you’re eligible to contribute.

Once the employer contribution formula is made, it can’t be modified. Your employer cannot terminate the SIMPLE plan during the year, nor can they stop or change the employer contributions during the year. They are obligated to make the employer contribution that was promised.

In addition to the employer notice, the financial institution that has your SIMPLE IRA must give the employer a “summary description” that contains certain information. This information includes the name and address of the employer and the financial institution, the requirements for eligibility and participation, and other information. In most cases, the financial institution gives the summary description to your employer who, in turn, forwards it to you along with the employer notice.

Article Highlights
  • November 1, 2012 is the deadline for employers who are continuing to offer a SIMPLE IRA plan for 2013 to send a notice to eligible employees
  • Once the employer contribution formula is chosen, it can't be changed
  • Financial institutions must also provide a summary description of the SIMPLE IRA 
 - By Joe Cicchinelli and Jared Trexler

Instant IRA Success Roundtable: October and Year-End Deadlines, Health Care Tax Issues

ed slott IRA, retirement and tax videos
We just returned from Instant IRA Success, which took place this past weekend (September 29-30) at The Cosmopolitan in Las Vegas. The entire Slott Report staff got together to discuss important October and year-end deadlines and the tax issues involved with the Affordable Care Act.  You can view our Instant IRA Success roundtable below, and view any of our other IRA, retirement and tax planning videos are our YouTube page, IRAtv.

-Compiled by Slott Report staff

Slott Report Mailbag: Can I Perform More Than One Taxable Roth Conversion Per Year?

This week's Slott Report Mailbag comes LIVE from The Cosmopolitan in Las Vegas as we get ready for Ed Slott's 2-Day IRA Workshop this Saturday and Sunday.  We answered questions on Roth conversions, the Roth IRA 5-year rules, and where an IRA goes at your death. 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.


Is it possible to perform more than one taxable Roth conversion during one 12-month period? Thanks you.

Send your questions to [email protected]
Amy Brocious

Yes it is. The one-rollover-per-year rule does not apply to conversions to Roth IRAs.


I began my 401(k) Roth deferrals in 2005 and contributed 3,000. In 2010, I put 5,000 in a Roth IRA. I rolled the 401(k) Roth funds into Roth IRA in 2011 (due to loss of job). Then later in 2011, I rolled the entire Roth IRA to another company (where current plan is).

Does the 5-year clock start over in 2010, 2011? Or does each Roth type (IRA and 401(k)) have 2 different 5-year clocks? Thank you.

The rules are a bit complicated, but basically the rollover from your Roth 401(k) to your Roth IRA in 2011 was six years from when you contributed in 2005. So if you were age 59 ½ or older when you did the rollover, then the rollover is considered a qualified distribution. For a qualified distribution of a Roth 401(k) to a Roth IRA, the entire amount of the distribution will be treated as a regular contribution (basis) and is available for distribution tax free. The 5-year Roth IRA holding period would not apply to these funds.

If you were not age 59 ½ or older when you did the rollover from the employer plan, then the rollover is considered a non-qualified distribution. When a non-qualified distribution is rolled over to a Roth IRA, the portion of the distribution that constitutes a non-taxable return of investment in the contract (your Roth 401(k) deferrals) is treated as contributions (basis) in the Roth IRA for the purpose of the ordering rules. The 5-year holding period for the distributions of earnings on those funds will be the period applicable to the Roth IRA which started in 2010.


I have a substantial IRA that goes into a trust when I die and whereby my spouse will continue to draw the income from the IRA upon my death and upon her death the IRA goes to my grandchildren. However, I have been told that if I die, the IRA must be liquidated and that the only way it would not be liquidated is if my wife is the sole beneficiary. My question is two fold. Is this correct? Or is there another way that my wife could benefit from the income generated by the IRA without the government taking a big chunk?

Pat B

No it’s not correct. Remember that your IRA does NOT “go into” a trust at your death. The trust becomes the beneficiary of the IRA and only has to take RMDs (required minimum distributions) from the inherited IRA each year. There is no rule that says that if your wife is not the sole beneficiary, the IRA must be liquidated. If the trust is a look-through trust, then death distributions will be made using your wife’s single life expectancy. If the trust is not a look-through trust, then death distributions will be paid over five years if you die before your required beginning date (RBD, generally April 1 of the year after attaining age 70 ½), or paid over your remaining single life expectancy if you die after your RBD.

- By Joe Cicchinelli and Jared Trexler

Making Life Difficult For Your IRA Beneficiary

An IRA account owner is trying to keep things simple or just does not get around to changing a beneficiary form. Only one person ends up being named on the beneficiary form. The account owner exacts a promise from that person that they will make sure that the account is split between all the children, or all the grandchildren, or all the siblings or whoever is important to the account owner. The unwitting beneficiary agrees to this since, after all, it is only fair that the account be split.

Now the account owner has died and the beneficiary wants to do the right thing - split the account out the way the owner wanted it done. But there is just one problem. The inherited IRA cannot be assigned or gifted from the inheriting beneficiary to the other intended beneficiaries. Every penny the inheriting beneficiary takes out to give to an intended beneficiary is included in the inheriting beneficiary’s income, not the income of the intended beneficiary.

You also run up against the gifting rules. The inheriting beneficiary can only give up to $13,000 (in 2012) to any individual in the year. If he gives more than that, he has to file a gift tax return.

This may have kept things simple for the account owner, but it creates a nightmare for the inheriting beneficiary. If the account owner truly wants to keep things simple, then he or she should have a beneficiary form that names exactly who should inherit the asset and it should include the exact share they should inherit.

  • Name the exact individuals you want to inherit your IRA on the IRA beneficiary form
  • IRAs cannot be transferred or assigned to beneficiaries who should have inherited but were not named
  • The named beneficiary must pay all income taxes on distributions
- By Beverly DeVeny and Jared Trexler

Roth Conversion Tax, Inherited IRA and RMD Questions Highlight Slott Report Mailbag

As crisp temperatures and autumn colors cascade through our neighborhoods, people start eying year-end IRA and tax planning.  We saw it in this week's Slott Report Mailbag with questions about a Roth conversion and paying the tax associated with it, distributions from inherited IRAs and the rules regarding what you can and can't do with RMDs (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.

ed slott IRA, tax and retirement planning questions and answers
Send questions to [email protected]

I am doing a partial conversion of my traditional IRA to a Roth IRA. I know that I will owe taxes and will use another source (not the traditional IRA) to pay the taxes. One way I am thinking about covering the taxes is to use stock losses (realized in my brokerage account). Is there a calculation to figure out how much of the taxes I will owe for the conversion will be covered by the stock losses from my brokerage account?

My guess is that it depends on the tax bracket for my AGI (adjusted gross income), which will be lower as a result of the stock losses, but I'm wondering if there is a calculation to help me approximate how much stock losses from a brokerage account would offset the taxes owed for the partial conversion. I hope this question makes sense and thanks for taking a look. Keep up the great work and thanks for the help!


Jeff A

It does depend on your AGI and corresponding tax bracket. Tax deductions, tax credits and other tax benefits can be used to offset Roth conversion income - but NOT capital losses. Capital losses can only offset capital gains and up to $3,000 of other income like Roth conversion income.

One thing we frequently recommend is that you run the numbers through a tax program. You do two “returns,” one with the Roth conversion and one without. That will give you the truest picture of the impact of the conversion on your taxes. In your case, you can play around with various stock loss amounts to see what works best for you.


I have two inherited accounts after the death of my sister, one an IRA and the other a Roth IRA. When I take my minimum distribution based on my life expectancy next year, does the distribution have to come out of each account separately or can I take it out of whichever account I choose?

The distribution must be taken from each inherited IRA. The tax treatments are different for each one (i.e., the IRA is taxable and the Roth is generally tax-free). Also, you cannot combine the two inherited IRAs.


Hi Ed,

If someone is over age 70 1/2 and starts taking their RMD for a given year, can they "convert" this RMD amount over to a Roth IRA? Assume the person has no earned income and is only considering converting the RMD amount for the year into a Roth, not any other portion(s) of their Traditional/Rollover IRAs.

Lastly, what if they do have earned income? I think the answer is "No" for both situations.


Matthew Holmes
Cincinnati, OH

You are correct. The answer is "No" for both situations. RMDs can never be converted to a Roth IRA. However, if someone over age 70 1/2 has earned income, they can make an annual contribution to a Roth IRA assuming their total income does not exceed certain levels (e.g., $173, 000 in 2012 for a married couple filing jointly).


If you are not working and your wife is employed, can you contribute to a Spousal IRA that is not in her name? Assume that income is not over the threshold of $173,000 if you are married filing jointly. Income earned by the spouse is more than the contribution.


Al Horila

Spousal contributions can be made to your IRA using your wife’s income (compensation). Your IRA must be in your name only; it cannot be in your wife’s name. There is no income limit to contribute to a traditional IRA but there is a $173,000 income cap in 2012 for contributing to a Roth IRA if you are married filing jointly.

- By Joe Cicchinelli and Jared Trexler

What Does IRA Stand For? Not What You May Think

If you're like the majority of people - including financial advisors and accountants - here's something you probably don't know. IRA does NOT technically stand for individual retirement account. Instead, the IRA stands for Individual Retirement Arrangement. If you don't believe me, just check out IRS Publication 590. It's right there on the cover.
ed slott what does IRA stand for

With that said, let's discuss what each of these three little words means in a little more detail.

Individual - Let’s think about this one for a second. An individual is a person, and for that matter, a single person. Therefore, it would stand to reason that only a person can be the owner of an IRA.

During your lifetime, you cannot gift your IRA to any other person or any other entity. You are the individual in IRA. It’s yours. If you “gift your IRA” to another person or you “move your IRA” into a trust, any portion gifted/moved is no longer an IRA and will be taxable to you.

Retirement - This main point here is pretty simple. IRAs are meant to be retirement accounts. This was Congress’ intention when they passed the laws creating IRAs and it should be your intention too.

Many Americans today are woefully under-prepared for the financial burdens they will face in retirement. While IRA contribution limits prevent you from contributing too much to an IRA each year, the relatively small contribution amounts can, over time, add up to big sums if left alone thanks to the power of compounding.

If the power of compounding isn’t enough of an incentive to keep you from touching your IRA funds early in life, remember, any IRA distributions taken prior to age 59 ½ are subject to a 10% penalty unless one of several exceptions applies.

Arrangement  - What’s an arrangement? Basically an agreement between two parties, right? Well, that’s the case here. The arrangement in this case is between an IRA owner and their IRA custodian. If you have an IRA, it must be held with a qualified custodian.

There are many rules that are the same regardless of what custodian you choose to house your IRA, but custodians can, in many cases, have different rules for different aspects of your account. Make sure you know the rules at your custodian because “an arrangement” is just another way to say “a deal.” And as we all know, once you sign on the dotted line, a deal is a deal.

- By Jeff Levine and Jared Trexler

Buying CDs Doesn't Magically Give You an IRA

When you open a new IRA, certain forms and paperwork must be filled out. Failure to do so can result in large IRS penalties and other harsh tax consequences as a recent court case showed.

A woman retired and received a large distribution from her former employer's retirement plan. She thought she deposited a large part of the distribution, in a tax-free rollover, to an IRA. She bought bank CDs and assumed that qualified as an IRA rollover and thus was tax-free. However, she never actually opened an IRA because she never signed an IRA contract with the bank.

You must fill out certain paperwork to have an IRA.
She also never signed a rollover form, which is required by the IRS. All she did was simply buy CDs outside of an IRA, which is not remotely the same as a tax-free IRA rollover. The Court said she owed income taxes and a 10% early distribution penalty because of the failed rollover.

To open a new IRA, several documents must be signed. First you must sign an IRA contract with the financial institution, which could be an insurance company, bank, broker, etc. That contract will include an IRA agreement and a disclosure statement. The IRA agreement is the controlling contract between you and the financial institution. The disclosure statement, which is usually attached to the back of the agreement, describes the IRA in layman’s language. The final document you should fill out is the beneficiary form.

If you are doing a rollover, you also must sign a rollover form, which the financial institution should provide to you. Lastly, you must buy an investment inside the IRA, such as a CD, annuity, mutual fund, etc. Simply buying an investment, without filling out the other paperwork, does not establish an IRA.

- By Joe Cicchinelli and Jared Trexler

The 5-Year Rules: Moving a Roth Employer Plan to a Roth IRA

You have a Roth 401(k), 403(b), 457(b) or federal government Roth TSP. You have left your job and want to move those funds to a Roth IRA. What 5-year rule applies to the rolled over funds?

Each Roth employer plan has its own 5-year clock unlike Roth IRAs, which have one clock that starts when you establish your first Roth IRA. This is the 5-year rule for “qualified” distributions, those distributions of earnings that are made after 5 years and age 59 ½ and thus are tax-free.

ed slott Roth IRA retirement planningA Roth IRA can never be moved into a Roth employer plan but when you leave your employer your Roth employer plan can be rolled over to a Roth IRA. Once that rollover is done, what 5-year clock applies to the funds you have just rolled over?

The Roth IRA 5-year clock is the one that will apply. This can be good - it can be bad.

Example: John, age 62, has had his Roth 401(k) for 7 years. He has no Roth IRA. He rolls his Roth 401(k) to a Roth IRA. His 5-year clock for the funds will be the one applicable to his Roth IRA. Since this is his first Roth IRA, he will not be able to take a qualified distribution of earnings until 5 years have passed.

Robert, age 62, has had his governmental Roth 457(b) for 2 years. He has had a Roth IRA for 7 years. He rolls his Roth 457(b) account to a Roth IRA. His 5-year clock for the funds will be the one applicable to his Roth IRA. Since he has had a Roth IRA for 7 years and he is over age 59 ½, any distributions of the 457(b) funds will be a qualified distribution (tax-free).

- By Beverly DeVeny and Jared Trexler

Should You Begin 72(t) (SEPPs, SOSEPPS) Distributions in the Fiscal or Calendar Year?

ed slott IRA 72(t) paymentsA client is setting up a 72(t) distribution schedule - substantially equal periodic payments that will be exempt from the 10% early distribution penalty. Her first distribution won't be made until September and she would like to take monthly payments. But she also wants the full distribution for the first year, not just four payments. Can she do this?

The answer is yes she can. An account owner can either use a calendar year for monthly payments or a fiscal year with a short first year and short last year.

So how do you go about doing this? We tell advisors and clients to keep things as simple as possible. The more changes or variations there are to the payments, the more likely it is that a mistake will occur. Mistakes in a 72(t) payment can be fatal. They can destroy the payment plan and leave the account owner subject to the 10% early distribution penalty retroactively for any of the payments made before age 59 ½.

The two easiest ways to get out a full current year’s distribution when monthly payments are desired are to take the 12 months as one for the current year and set up the monthly payments beginning next year. The other way would be to set up the monthly payments beginning in September of the current year and take a one time, lump sum distribution of the remaining monthly payments for the year.

What if a mistake is made this early on? The payment plan should be terminated and any applicable penalties should be reported on IRS Form 5329 and paid. A new plan can be established in the following year. Make sure a new calculation is done for the new plan. Don’t use the old one from the plan that blew up. Interest rates change monthly and you are limited in the rates you can use when you set up a 72(t) plan.

- By Beverly DeVeny and Jared Trexler

RMD and Roth IRA Conversion Questions Highlight Slott Report Mailbag

Fall is upon us, at least that's what we think every time we walk past a coffee shop.  People are beginning year-end retirement planning preparations, and this week's Slott Report Mailbag includes questions on required minimum distributions (RMDs) and two different scenarios for Roth conversions.  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.


My wife, Susan, retired as a New York City teacher in 2003.

If she resumes employment with a different employer (which employer does not have a 403(b)) plan, is she entitled to defer RMDs past the regular age 70 ½ date?

If not, what if the new employer has a 403(b) plan? Is she entitled to defer if she “goes back” as a substitute teacher or administrative employee with the same employer, i.e. New York City Board of Ed?

The rule is that you can only defer RMDs in the plan of the employer where you are currently employed. For example, you retire from McDonald's and get a job with IBM. Both companies have a 401(k) plan. You can only defer RMDs from the IBM plan because that is your current employer. You will have to take RMDs from the McDonald's plan.

Send your questions to [email protected]

Hi Ed:

I'm thinking of rolling over either a portion, or all, of my regular IRA as well as my Defined Comp. plans to a Roth IRA. I am now retired and will not need to draw on them and would like to leave them to my beneficiaries for tax purposes. If something happens to me within five years of the rollover will they have a problem?

Jim M

The conversion of your IRA or Qualified Retirement Plans to a Roth IRA will be taxable to you when you convert the funds. If you die within five years of the conversion, your beneficiaries will not be taxed on the withdrawal of the conversion funds because you already paid taxes on those funds. Also, they will not have to pay the 10% penalty because the penalty is waived for death distributions. Lastly, if your beneficiaries withdraw the earnings on the converted funds within five years, assuming this is your first Roth IRA, they will be taxed on the earnings only, but no 10% penalty.


Dear Mr. Slott,

A few days ago, I watched your program on PBS in which you highly recommended to rollover a 401(k) to a Roth IRA. I would like to ask you for a favor to advise me what to do, rollover my 401(k) to Roth IRA or just to Traditional IRA? I am a 77-year-old retiree and my current tax bracket is 15%. Every year I have to get the maximum distribution without penalty from my 401(k) to supplement my Social Security for my family expenses.

I greatly appreciate your kind advice.

Ton Le

The decision to convert funds is an important one. Here are some general principles. A rollover from your 401(k) to a Roth IRA will be taxable so you’ll have to come up with the money to pay the taxes on it, ideally from non-retirement plan funds. Converting funds at the 15% tax bracket is relatively inexpensive and beneficial, but the conversion could put you in a higher tax bracket. It could also affect your deductions, exemptions, credits and phase-outs as well as make some of your Social Security income taxable. Withdrawals from Roth IRAs are generally tax-free. However, because you’ve indicated that you use your 401(k) distributions for your family expenses, you’ll initially have more expenses (i.e., the tax bill on the conversion) after the conversion. Speaking with a competent advisor is recommended.

- 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.