Market Review and Outlook

By Sarah Brenner, JD
Director of Retirement Education

It’s August and that means it is back-to-school time! The 2025-2026 school year is upon us. Kids are already back in the classroom and ready to learn.

Any parent will tell you that back-to-school time is an expensive time of the year. You cannot afford to miss out on any possible option that may help you save to cover education costs. There are often discussions about tax credits and 529 plans savings plans, but one tool that that you might overlook is the Coverdell Education Savings Account (ESA). Here is what you need to know.

ESA Contributions

You may establish an ESA with the custodian of your choice. The paperwork you complete is very similar to the paperwork necessary to establish an IRA. Contributions are made to the account to help save for education expenses of a designated beneficiary. The designated beneficiary is a child under the age of 18. You can make a contribution for your child, grandchild, or any other child under the age of 18. Contributions may be made for designated beneficiaries older than 18 if they have special needs. Your ESA contribution is not deductible, but the earnings will be tax-free if the funds are used to pay for qualified education expenses.

The maximum ESA contribution amount is $2,000 per year for each child, but you may contribute that amount to ESAs for multiple beneficiaries. For example, if you have three grandchildren, you could contribute $2,000 each year to each of their ESAs. There is no earned income or taxable compensation requirement to contribute to an ESA. There are no age limits either. There are income limits. If your income is above them, you might consider giving the funds to the child or another person with income under the limits and having them make the contribution to avoid those restrictions.

The contribution deadline is generally the tax-filing deadline, April 15. ESA funds are even eligible to be rolled over to qualified tuition plans.

ESA Distributions

Qualified distributions from an ESA are tax-free. The definition of qualified education expenses is very broad for ESA purposes. Qualified education expenses include college tuition, room and board as well as required books and supplies. The student can be a full-time or part-time student. Vocational school or community college expenses are included as well. A student’s computer and internet expenses are also qualified education expenses.

An important benefit of an ESA is that qualified tax-free distributions may be taken for primary and secondary school expenses. You are not limited to expenses after high school graduation. Eligible expenses include tuition, fees, tutoring and special needs services and expenses incurred in connection with enrollment of the designated beneficiary at a public or private school.

If an ESA distribution is not used for education expenses, the earnings portion will be taxable to the designated beneficiary and may be subject to a 10% penalty, unless an exception applies. Funds may be rolled over from an ESA to an ESA for a member of the designated beneficiary’s family who is under age 30.

ESA Benefits

Sometimes the benefit of ESAs is overlooked due to the relatively low contribution amounts, but this is short-sighted. With the costs of education, you will need every strategy and tax break that is available! Don’t miss out on ESA benefits. If you are already funding a qualified tuition plan or 529 plan, you can still fund an ESA as well.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/tapping-an-esa-for-back-to-school-expenses/

By Sarah Brenner, JD
Director of Retirement Education

Question:

I recently retired in January and rolled over a lump sum pension from my previous employer into my IRA. Next month, I’m planning to roll over my 401(k) from the same employer into the same IRA as well. Would these two actions run afoul of the once-per-year rollover rule? Thanks.

Answer:

Good news! You have nothing to worry about with regard to the once-per-year rollover rule. This rule only applies to 60-day rollovers between traditional IRAs or between Roth IRAs. It does not apply to rollovers from plans to IRAs.

Question:

We have a client who has a SEP IRA plan for their small business. They are having difficulty making SEP IRA contributions for eligible employees. They are under the impression that if they send notification to employees but don’t hear back, they would not have to worry about funding the SEP IRA. Is this correct?

Answer:

Unfortunately, it is not that easy. The rules say that any employee who is eligible to receive a SEP contribution must get one. Under the regulations, an employer is even allowed to establish a SEP IRA on behalf of an employee if the employee is unable or unwilling to do so.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/the-once-per-year-rollover-rule-and-sep-contributions-todays-slott-report-mailbag/

By Andy Ives, CFP®, AIF®
IRA Analyst

The Ed Slott team has answered literally tens of thousands of IRA and retirement plan questions over the past few years. That is not hyperbole—we track it all. The questions we’re asked run the gamut from basic to extremely complex. Most inquiries are honest and straightforward: “What is the rule about this?” “How do I do that?” and so on. On occasion, however, we get some zingers. Just off the top of my head, here are some of the craziest questions and scenarios I’ve encountered.

A gentleman, over age 70½, wanted to donate $90,000 to his two grandchildren’s school via a QCD (qualified charitable distribution). This was a perfectly reasonable request. With a QCD, the donation goes directly from the IRA to the receiving organization, and no goods or services can be accepted for the donation. I was then asked if, upon the grandfather making the donation, could each grandchild receive a $45,000 scholarship? Um, no.

I was at a speaking engagement teaching the crowd of financial advisors that, if a person under the age of 59½ does a Roth conversion, you should not have the taxes withheld from the IRA. Why? Those taxes withheld are technically an early withdrawal, and there is a 10% penalty on the withheld taxes. An advisor approached me during the next break and admitted that he always had the taxes withheld on Roth conversions, even for young people. Regarding the pending 10% penalty, he asked, “Do you think anyone will notice?”

Speaking of Roth conversions, an advisor called to discuss a conversion strategy for his elderly client. He was excited about the prospect of his client having tax-free earnings and eliminating future required minimum distributions (RMDs). I asked who the beneficiaries were and was told the woman had no spouse and no children. Everything was going to charity. I said, “Stop. No more conversions. Charities don’t pay taxes. Don’t make her pay the tax on all these dollars.”

A person set up a 529 college savings plan for each of his two children. Both accounts were now funded with over $300,000 each. Dad asked if he could immediately roll over all $300K into a Roth IRA for each child. No deal. 529-to-Roth rollovers are capped at $35K lifetime, and annually up to the IRA contribution limit. (First-world problems for those kids, huh?)

I had another 529 situation where the account held over $500,000. The crazy part was, the owner had no children and no grandchildren, and apparently no one in his immediate circle who needed funds for education. How and why the heck was this account ever established?

Another person had a QCD check rejected because the charity no longer existed. The dollars still showed as being paid out as a QCD, and the IRA owner wanted to pocket the money. The person’s bright idea was to establish a bogus charity, intentionally have future QCD checks rejected, keep the cash, and pay no tax. C’mon, man! This won’t work. The IRA custodian said the account was out of balance and they were required to redeposit the rejected QCD check into the IRA.

Be careful out there, people. It’s crazy.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/the-craziest-stuff-ive-heard/

By Ian Berger, JD
IRA Analyst

At Ed Slott and Company, we continually stress how important the beneficiary designation form is. Because it’s that form – and not the retirement account owner’s will or other estate planning documents – that usually dictates who will receive the owner’s IRA or 401(k) account after death.

But, as a recent case shows, for ERISA plans, there is one rule that trumps the beneficiary designation form: The spousal beneficiary rule. That rule says that a married ERISA plan participant’s 401(k) balance must automatically be paid to his surviving spouse after death – unless the participant names another beneficiary and the spouse consents to the non-spouse beneficiary.

In LeBoeuf vs. Entergy, No. 24-30583 (5th Cir. 2025), Alvin Martinez started working for Entergy Corporation in 1967 and participated in the company’s ERISA 401(k) plan. In 2002, Martinez’s wife died. In 2010, he named their four children as beneficiaries on his 401(k) plan beneficiary designation form. The form clearly spelled out the ERISA spousal beneficiary rule. It also warned participants to update the form and get spousal consent if they get married after submitting it. The form noted that a later marriage automatically revokes a prior beneficiary designation without spousal consent. There was similar language in the official plan document and written plan summaries that Martinez received.

Martinez retired in 2003 and kept his 401(k) funds in the plan. In 2014, he married Kathleen Mire. Martinez received quarterly statements from T. Rowe Price, the plan’s trustee, that told him how his plan investments were doing. Even after his second marriage, these statements listed the four children as his beneficiaries and did not mention the ERISA spousal beneficiary rule.

Martinez died in 2021, with a whopping $3.0 million in his 401(k) account. Martinez never updated his beneficiary designation form, and Mire (the second wife) never signed a waiver of her spousal rights. So, as required by ERISA, the plan paid the $3.0 million to Mire.

Naturally, the children sued, and the case was appealed to the Fifth Circuit Court of Appeals, which covers Louisiana, Mississippi and Texas.

The Court of Appeals said that the plan had acted properly. The children argued that Entergy Corporation, the plan’s administrative committee, and T. Rowe Price were all plan fiduciaries under ERISA, and they breached their fiduciary duty by issuing those quarterly statements to Martinez (which listed the children as beneficiaries but did not mention the spousal beneficiary rule). But the Court found that Entergy and T. Rowe Price were not ERISA fiduciaries. Even though the committee was a fiduciary, it hadn’t breached its duty.

We don’t know whether Martinez intended for his four children or his second wife to receive the $3.0 million. But, in either case, this case shows how important it is to periodically review and, if necessary, update beneficiary designation forms. That’s especially true after life events like a second marriage. Yet, if a spouse refuses to consent to another person being named as beneficiary, there’s nothing that can be done to prevent the spouse from receiving the money after the 401(k) owner dies.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/in-erisa-retirement-plans-spouse-beneficiaries-rule/

By Andy Ives, CFP®, AIF®
IRA Analyst

QUESTION:

I turn age 73 on December 1, 2026. I would like to do a Roth IRA conversion on January 1, 2026, prior to turning 73 years old. Does my first required minimum distribution (RMD) begin January 1, 2026, the year that I turn age 73? Am I correct that my RMD must be satisfied before a conversion?

Best regards,

Terry

ANSWER:

Terry,

You are correct that you must satisfy your full IRA RMD from all of your traditional IRAs (assuming you have more than one) before doing any Roth IRA conversions in 2026. The first withdrawals taken from an IRA are deemed to count toward the RMD. Since you will turn age 73 in calendar year 2026, and since RMDs cannot be converted, the full 2026 RMD amount must be satisfied before you can do a conversion later that same year.

QUESTION:

I have a client who is RMD age and does not have an existing Roth IRA. If he converts his traditional IRA to a Roth IRA and dies before his 5-year clock holding period is satisfied, can the beneficiaries satisfy the 5-year clock? Are the earnings taxable?

-Elena

ANSWER:

Elena,

Once your client satisfies his RMD for the year, he can then convert all or a portion of his IRA to a Roth IRA. If he has never had a Roth IRA before, the conversion starts his 5-year clock for tax-free earnings. If he were to die prior to satisfying this clock, his beneficiaries would have to wait out your client’s full 5 years before the earnings in the inherited Roth IRA would be tax-free. This is true even if a beneficiary held his own (not inherited) Roth IRA for more than 5 years.

Fortunately, based on strict Roth IRA distribution ordering rules, the beneficiaries can draw down all the converted dollars prior to even reaching the earnings. If they needed a little cash, that could buy them some time to wait out the clock. If, however, the earnings were withdrawn by a beneficiary prior to the 5 years, those dollars would be taxable, but there would be no penalty.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/required-minimum-distributions-and-ira-beneficiaries-todays-slott-report-mailbag/

By Andy Ives, CFP®, AIF®
IRA Analyst

Are the current tax brackets, made “permanent” by OBBBA, really here forever?

Not necessarily. The One Big Beautiful Bill Act (OBBBA) did extend the tax rates established by the 2017 Tax Cuts and Jobs Act “permanently.” But that word has a different meaning when it comes to tax law. Yes, the current tax brackets are locked in…at least until a future Congress decides to change them. So, leverage these low brackets for Roth conversions while they are still here, because “permanent” may not mean what you think.

How old does a beneficiary have to be to do a QCD?

There are a number of rules governing qualified charitable distributions (QCDs). The first of which is: To be eligible to do a QCD, a person must be age 70½ or older. But the question says “beneficiary.” Yes, QCDs can be done from an inherited IRA…but the same standard rules apply. The beneficiary of the inherited IRA must be age 70½ or older to do a QCD. It does not matter if the original IRA owner (now deceased) was age 70½ or not.

What year does the age 75 RMD rule take effect?

Technically, the required minimum distribution (RMD) age bumps up to age 75 in 2033. But in reality, we won’t feel the effects until 2035. Why so? Well, anyone who turns age 75 in 2033 or 2034 would have turned 73 (the current RMD age) two years prior (in 2031 or 2032, respectively). Therefore, these people will fall under the existing age 73 RMD rule. In fact, there will be a 2-year adjustment period to the new RMD age in 2033 and 2034. To qualify for the age 75 RMD rule, you must turn age 75 in 2035 or later. Therefore, the age 75 RMD rule applies to anyone born in 1960 or later.

Does the pro-rata rule apply to Roth IRA conversions if a person has NO after-tax dollars in any of their own IRAs, but they DO have after-tax (non-Roth) dollars in a 401(k)?

It does not. Pro-rata dictates that if after-tax (non-deductible) dollars exist in a traditional IRA, SEP or SIMPLE, a person cannot cherry pick only those dollars for Roth conversion (or withdrawal). A proportionate share of pre- and post-tax dollars must be accounted for. Any after-tax dollars that a person might have in their 401(k) are disregarded. (Note: This is also true if a person has after-tax dollars in an inherited IRA. While pro-rata does apply to inherited IRAs, those accounts are ignored when a person calculates pro-rata on his own IRAs.)

Can you take a distribution from a “Trump account” before the year the beneficiary turns age 18?

No, you cannot. There is currently no mechanism to withdraw any dollars from the newly created “Trump accounts” prior to the year when the child beneficiary turns age 18, regardless of what the dollars might be used for or what the emergency is. As things currently stand, when any money goes into this new savings vehicle, those funds are on full lockdown until the year the beneficiary turns age 18. This includes contributions from any source – the “seed” money from the government, personal contributions, or contributions made by an employer or any other source. In the year the beneficiary turns age 18, IRA distribution rules apply. But until then – there is zero access.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/5-random-retirement-account-trivia-questions/

By Ian Berger, JD
IRA Analyst

Question:

I am 70 years old and do not have to start taking required minimum distributions (RMDs) for three years. Can I do a qualified charitable distribution (QCD) from my IRA now? Or, do I have to wait until age 73 when I have to start taking RMDs?

Elaine

Answer:

Hi Elaine,

You do not have to wait until age 73 to do a QCD, but you do have to wait until you reach 70½ (the date six calendar months after your 70^th birthday).

Question:

Does the beneficiary of a 529 plan have to have earned income in order to transfer funds from his 529 account to his Roth IRA account? The 529 plan told me it is not required, but my son did some research that says that it is. I would appreciate some clarification.

Thanks,

Ray

Answer:

Hi Ray,

Your son is correct. A 529 beneficiary doing a Roth IRA rollover must have compensation in the year of the rollover that is at least equal to the amount being rolled over. The confusion may be because the income limitations on Roth IRA contributions don’t apply to these rollovers. A 529 beneficiary could do a 529-to-Roth IRA rollover even if she earns too much to make a Roth IRA contribution for that year.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/qcds-and-529-to-roth-ira-rollovers-todays-slott-report-mailbag/

By Ian Berger, JD
IRA Analyst

A recent Slott Report article discussed “Trump accounts,” the new savings vehicle for children created by the One Big Beautiful Bill Act (OBBBA). As with most new laws, there are a number of unanswered questions about Trump accounts that need to be addressed by the IRS. Fortunately, since Trump account contributions can’t be made before July 4, 2026, the IRS should have enough time to issue guidance. Here are the some of the outstanding questions:

1. How will Trump accounts be established? OBBBA says that a Trump account can be established by the Federal government or by any person. However, if a person opens up a Trump account, it must be funded by a direct transfer of 100% of the funds from another Trump account. This seems to require that a child’s first Trump account must be established by the Federal government, but the IRS must clarify this. Also, the IRS must tell us how a person can establish a Trump account.

2. How will elections be made? OBBBA calls for an election to be made by an individual to accept the $1,000 Federal government contribution on behalf of an eligible child. However, there are no details as to how this election will be made. There has been speculation that it can be made as part of the parents’ federal tax return, but official guidance is needed.

3. Will Roth conversions be allowed starting in the age-18 year? OBBBA is clear that beginning in the year the child turns age 18, Trump account contributions made before the age-18 year (and earnings) automatically assume the normal traditional IRA rules. (Those rules also apply to any contributions made to a Trump account in the calendar year the child turns 18 or later years.) This would suggest that Trump account funds can be converted to a Roth IRA starting in the age-18 year. A Roth conversion would be a great opportunity since it would allow for decades of tax-free growth on the Trump account funds. Hopefully, the IRS will confirm that a Roth conversion is possible.

4. Will Trump account funds be subject to required minimum distribution (RMD) rules? If Trump account funds take on the usual IRA rules in the age-18 year, it would stand to reason that they become subject to the RMD rules if the account owner holds it until later in life. Yet, there has been some uncertainty over whether the RMD rules do apply.

5. Is the employer Trump account contribution limit a lifetime limit or an annual limit? OBBBA also allows for employer-provided contributions to Trump accounts for teenage employees and dependents of employees before the year they turn age 18. There is a $2,500 limit on these contributions. Read literally, OBBBA says that this is a lifetime limit per employee – not an annual limit (like the $5,000 limit on Trump account contributions made by parents, grandparents or others). However, some commentators have described this as an annual limit.

6. Do employer contributions count towards the $5,000 limit? OBBBA specifically says that the $1,000 Federal government contribution doesn’t count towards the $5,000 annual maximum. The same is true for any contribution made by a tax-exempt organization. But OBBBA does not say that employer contributions don’t count. We think Congress may have made a drafting error and really intended that employer contributions also don’t count towards the $5,000. It would be an administrative nightmare for employer contributions to be coordinated with contributions from parents and others. We hope to hear more from Congress or the IRS on this.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/six-unanswered-questions-on-trump-accounts/

By Sarah Brenner, JD
Director of Retirement Education

Laurence Tureaud, born May 21, 1952, is better known as Mr. T. He is an actor and a retired professional wrestler. He is famous for his roles as B. A. Baracus in the 1980s television series “The A-Team” and as boxer Clubber Lang in the 1982 film Rocky III.

Time catches up with all of us, and this year Mr. T is celebrating his 73^rd birthday. That means it is now time for him to take required minimum distributions (RMDs) from his IRA. Here are five easy steps Mr. T can take to make sure he gets his first RMD right.

Step 1. Determine the distribution year

Mr. T turned age 73 back in May, so the RMD we are calculating is his 2025 RMD. This is his first RMD, so he will have until April 1, 2026, to take it. Every year thereafter he will need to take his RMD by December 31. So, Mr. T could delay his 2025 RMD until next year, but if he does that, he will need to take two RMDs in 2026.

Step 2. Find the IRA balance

To calculate Mr. T’s 2025 RMD, we will need to know his December 31, 2024, balance. This is the balance that is used even if Mr. T waits until sometime in 2026 (by April 1) to take his 2025 RMD. We will need to adjust this 12/31 balance for any outstanding rollovers or transfers.

Step 3. Look up the life expectancy factor

To determine the RMD, we will need a life expectancy factor. Most IRA owners will use a factor from the Uniform Lifetime Table . We will simply take Mr. T’s age (73) and find the factor that corresponds (26.5). Those who have named a spouse who is more than ten years younger as their sole beneficiary may use the Joint Life Expectancy Table.

Step 4. Divide the account balance by the life expectancy factor

The next step is doing the math. We simply divide the December 31, 2024, balance of the IRA by the life expectancy factor (26.5).

Step 5. Take the RMD

The final step is making sure the RMD is taken by the deadline. If the RMD is missed there is a 25% penalty. Mr. T should be sure to take his 2025 RMD by April 1, 2026, to avoid any penalties. “I pity the fool” who misses this date.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/mr-t-i-pity-the-fool-who-misses-their-rmd/

By Sarah Brenner, JD
Director of Retirement Education

Question:

Can I satisfy my required minimum distribution (RMD) from my 401(k) by taking it from my IRA instead?

Answer:

No, that is not allowed. You may aggregate RMDs from your IRAs if you have multiple accounts, but you are not permitted to aggregate your IRA and 401(k) RMDs. You will need to take your 401(k) RMD from that plan.

Question:

I have multiple IRAs.  Do I have to take the total RMD from these accounts before I do an IRA transfer, as opposed to a rollover?

-Dave

Answer:

Hi Dave,

You must take all of your IRA RMDs prior to completing a 60-day rollover or a Roth conversion. However, the rules are different for transfers. If you are doing a direct transfer between IRAs, there is no requirement that the RMD must be taken prior to the transfer. You can wait until later in the year but just be sure you remember to take it.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/required-minimum-distributions-and-ira-transfers-todays-slott-report-mailbag/

By Andy Ives, CFP®, AIF®
IRA Analyst

While the ability to recharacterize Roth conversions was eliminated years ago, Roth contributions can still be reversed. A Roth IRA contribution can be recharacterized to a traditional IRA, or vice versa. To recharacterize an IRA contribution, the IRA custodian will transfer the funds, along with the earnings or loss attributable (“net income attributable” or NIA), from the first IRA to the second IRA. The IRA custodian may be willing to calculate the NIA, or that responsibility could fall on the IRA owner.

NIA must be determined by a special IRS formula, which is the same formula used to determine NIA when removing an excess IRA contribution. IRS Publication 590-A includes a worksheet titled “Determining the Amount of Net Income Due to an IRA Contribution and Total Amount to Be Recharacterized.” The inputs needed for the worksheet include the amount of the contribution, the fair market value (FMV) of the IRA immediately prior to the contribution being made, and the FMV immediately before the recharacterization. (Note that NIA is not specific to the investment where the soon-to-be-recharacterized contribution was made, but it is rather based on the overall performance of the entire IRA.)

The deadline for recharacterization is October 15 of the year following the year for which the contribution was made. The recharacterized contribution is treated as if it had always been made to the intended IRA. While recharacterization is a tax-free transaction, both IRAs report the transactions to the account owner and the IRS. How so?

A recharacterized contribution will generate both a 1099-R and a Form 5498. The first IRA will report the recharacterized amount, plus NIA, as a distribution on Form 1099-R. The second IRA (the receiving IRA) will generate a Form 5498. On the 1099-R, both the recharacterized contribution amount and the NIA (i.e., the current FMV of the recharacterized amount) are reported in Box 1, Gross distribution, with “0” in Box 2a, Taxable amount. The distribution code will be either an “N” or “R.” The Form 1099-R instructions read as follows:

“N – Recharacterized IRA contribution made for 2025. Use Code N for a recharacterization of an IRA contribution made for 2025 and recharacterized in 2025 to another type of IRA by a trustee-to-trustee transfer or with the same trustee.”

“R – Recharacterized IRA contribution made for 2024 or a previous year. Use Code R for a recharacterization of an IRA contribution made for 2024 and recharacterized in 2025 to another type of IRA by a trustee-to-trustee transfer or with the same trustee.”

Form 5498 will report the total amount being recharacterized in Box 4, Recharacterized contributions. Be sure that if you recharacterize an unwanted traditional IRA contribution to a Roth IRA, you are otherwise eligible to contribute to a Roth IRA (i.e., You are not over the Roth IRA contribution phase-out limits.).

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/reporting-a-recharacterization/

By Ian Berger, JD
IRA Analyst

Many of you are familiar with the tax advantages that Roth retirement accounts can bring. Although Roth contributions are made with after-tax dollars, the contributions grow tax-free, and earnings also come out tax-free after age 59½ if a five-year holding period has been satisfied.

A recent survey by the Plan Sponsor Council of America showed that 93% of 401(k) plans offer employees the option of making Roth 401(k) salary deferrals. Let’s say your plan allows Roth contributions, but you don’t have the funds to maximize both those contributions and Roth IRA contributions. Which one should you contribute to? It turns out that each option has its own advantages.

Here are the reasons why Roth IRAs are more attractive than Roth 401(k)s:

• Roth IRAs offer unlimited investment choices, but Roth 401(k)s are limited to whatever investment options the plan offers.
• You usually can’t withdraw your Roth 401(k) account until you turn age 59½ (or leave your job). By contrast, Roth IRAs are always available (although earnings may be taxable and subject to penalty).
• The rules for determining whether a Roth distribution is a “qualified distribution” (that is, whether earnings come out tax-free) is easier to satisfy for Roth IRAs than it is for Roth 401(k)s. For Roth IRAs, the five-year holding period begins with the first contribution or conversion to any Roth IRA. For Roth 401(k)s, the five-year period begins with the first contributions to that particular 401(k) plan.
• Roth IRA distributions that don’t meet the conditions for a “qualified distribution” are subject to favorable ordering rules allowing you to withdraw all of your tax-free contributions and conversions before your taxable earnings. On the other hand, Roth 401(k) distributions that are not qualified must meet a pro-rata rule that causes a part of the distribution to be taxable.
• Before 2024, Roth IRAs had an advantage over Roth 401(k)s when it came to lifetime required minimum distributions (RMDs). Roth IRA owners have never been required to take RMDs, but up until 2024, Roth 401(k) owners were required to take them. Now, neither is subject to lifetime RMDs.

On the other side of the coin, Roth 401(k)s may be a better option for the following reasons:

• Roth 401(k) funds may offer you more protection from creditors than Roth IRAs if you wind up on the losing end of a lawsuit. If the Roth 401(k) is part of an ERISA plan, you have an unlimited shield from creditors’ claims. By contrast, Roth IRAs only give you the creditor protection available in the state where you live. State law can provide less protection than ERISA does.
• Most plans allow employees to borrow against their Roth contributions, but Roth IRA owners are not allowed to take loans against those funds.
• Many 401(k) plans will match Roth 401(k) employee contributions, but your custodian won’t match your Roth IRA.
• Unlike Roth IRA contributions, Roth 401(k) contributions are not subject to annual income limits (although the plan may restrict contributions made by highly-paid employees).

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/roth-ira-vs-roth-401k-which-is-better/

By Andy Ives, CFP®, AIF®
IRA Analyst

QUESTION:

Does the new $6,000 additional deduction for seniors under the One Big Beautiful Bill Act (OBBBA) also apply if the senior itemizes their taxes?

Thanks,

Robert

ANSWER:

Robert,

The new $6,000 addition to the standard deduction is for seniors aged 65 and older for years 2025-2028. This is per person, so a married couple could deduct up to $12,000 if each spouse is aged 65 or over. This is in addition to the regular standard deduction AND the extra deduction for those aged 65 or blind. This new deduction will also be available to seniors who itemize.

Note that the deduction phases out beginning with modified adjusted gross incomes of $75,000 for individuals and $150,000 for married filing jointly. It phases out completely at $175,000/$250,000, respectively.

QUESTION:

Hello,

I have a SEP-IRA annuity which was opened in 2011. I am age 74. I am considering doing a full conversion of the total SEP annuity balance to a Roth annuity, while keeping all of the particulars of the annuity policy the same. After paying the tax on that total conversion amount, do I have to wait 5 years after that conversion for the monies to become totally tax free? I have established a Roth already and I am over age 59½.

Duane

ANSWER:

Duane,

I am operating on the assumption that the Roth IRA you already established has been open for 5 years. Since you are over age 59½ AND you have already owned a Roth IRA for 5 years, then you never have to wait out another 5-year clock. Upon converting your SEP IRA annuity to a Roth IRA, any and all future earnings with be immediately available for withdrawal tax- and penalty-free. (Just be sure you take your required minimum distribution before doing the conversion.)

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/the-one-big-beautiful-bill-act-obbba-and-sep-iras-todays-slott-report-mailbag/

By Sarah Brenner, JD
Director of Retirement Education

Summer of 2025 brought us the new season of the hit TV show, Love Island. When a new contestant arrives on this popular reality dating show, its viewers know that “another hot bombshell has entered the villa.” The summer of 2025 has also brought us the One Big Beautiful Bill Act (OBBA) and, with the new law’s arrival, another hot bombshell enters the tax-advantaged account villa. Trump Accounts now join the ranks of the many ways Americans can save using individual accounts.

Tax Advantaged Accounts

There was a time when jobs offered pensions and health insurance with little or no out-of-pocket expenses. College tuition could be paid with earnings from a summer job. Those days are gone, and more and more Americans are finding themselves on their own to save and pay for things that previous generations were lucky enough to have at little to no cost.

Congress’s response has been to create tax advantaged accounts. These accounts can help those who can afford to make contributions, and there are now many different options available.

IRAs: Traditional IRAs are the original individual account. These retirement savings accounts offer a tax deduction for contributions for some and tax deferral of earnings for everyone. Anyone with taxable compensation can contribute to an IRA. There is no employer involvement needed.

Roth IRAs: Since 1997, Roth IRAs have offered an alternative to traditional IRAs for retirement savings. These accounts (which also require earned income to contribute) do not offer any tax deduction, but the trade-off is tax-free earnings in the future.

529 Plans: These are savings plans operated to make it easier to save for educational expenses. Earnings are not subject to federal tax and generally not subject to state tax when used for the qualified education expenses of the designated beneficiary.

ESAs: Education Savings Accounts (ESAs) are also for saving for education. They are individual accounts, like IRAs, and can be used for a broad range of both K-12 and post-high school education expenses. Earnings are tax-free if used for education.

HSAs: For those with high-deductible health insurance, contributing to a Health Savings Accounts (HSAs) can help with health care expenses. Contributions to HSAs are deductible regardless of income level and any distributions used for qualified health expenses are tax-free.

ABLE Accounts: Achieving a Better Life Experience (ABLE) accounts allow eligible people with disabilities to save money in a tax-advantaged account without jeopardizing their eligibility for certain public benefits programs. Earnings in the account grow tax-deferred and are tax-free if used for qualified disability expenses.

Another hot bombshell has entered the villa! Trump Accounts: Effective July 4, 2026, parents and others can contribute up to a total of $5,000 per year on behalf of a child. Contributions by employers and nonprofits are also permitted. Accounts for babies born between January 1, 2025, and December 31, 2028, will be seeded with a one-time government contribution of $1,000. Earnings are tax-deferred until distribution.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/trump-accounts-a-hot-new-bombshell-enters-the-tax-advantaged-account-villa/

By Andy Ives, CFP®, AIF®
IRA Analyst

Last week in Chicago, the Ed Slott and Company team hosted another successful 2-day advisor training program. A sellout crowd of over 260 financial professionals from across the country joined us for some intense IRA and retirement plan education. Topics included all things Roth, net unrealized appreciation (NUA), naming trusts as IRA beneficiaries, the new qualified charitable distribution (QCD) 1099-R reporting codes, 10% penalty exception rules, creditor/bankruptcy protection rules, and the list goes on. Additionally, we clawed through the weeds of the One Big Beautiful Bill Act (OBBBA) and the sections of the law that impact Roth conversions. We also provided an overview of the new “Trump Accounts,” of which the finer details are still to be ironed out.

Between each session, participants were welcome to approach us and ask any questions they might have. As expected, inquiries continued at breakfast, lunch, in the elevator and through the lobby! This is complicated material. As presenters and hosts, we fully expect to get bombarded with questions. It is our pleasure to discuss targeted issues, ask probing questions, make recommendations, and send people down the proper path with a smile and a handshake. If it weren’t for the positive energy from each and every participant, seminars like this would not be nearly as enjoyable. Interestingly, some inquiries repeated themselves. Here are some of the more popular questions:

Do inherited Roth IRA beneficiaries have to take annual RMDs (required minimum distributions) or not? The answer is: It depends. If the Roth IRA beneficiary qualifies as an eligible designated beneficiary (EDB), then he has a choice. He can choose to take lifetime “stretch” RMDs based on his own single life expectancy, OR he can choose the 10-year payout rule. If he chooses the latter, there will be no annual RMDs in years 1 – 9 of the 10-year period, but the account will need to be emptied by the end of year ten.

What if a person turned age 73 this year, but died before taking her RMD? Does her IRA beneficiary still have to take the year-of-death RMD? In fact, there is no RMD to take. Since this person just turned age 73 in 2025 but then passed away, she never made it to her required beginning date (RBD), which was April 1, 2026. Since she did not make it to the RBD, then RMDs were never “turned on.” A person takes her first RMD in anticipation of making it to the RBD. But if that person dies prior to the RBD, then there is no year-of-death RMD to take.

Can you explain the pro-rata rule? The pro-rata conversation requires an example, so here is a link to a recent Slott Report pro-rata rule article: irahelp.com/pro-rata-not-double-tax.

Additional popular questions pertained to the tax reporting of Roth retirement plan matching contributions, RMD aggregation rules, and when IRA payouts to a trust beneficiary can be impacted by the high trust tax rates. It was our pleasure to answer every inquiry to the best of our ability. We look forward to the next 2-Day IRA Workshop, which will be held virtually on September 17 and 18 and in-person on February 12-13 in Las Vegas.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/last-week-in-chicago/

By Ian Berger, JD
IRA Analyst

Question:

I have a client who died last month. She would have been age 83 this year. She had an IRA. Her husband, age 87, was the beneficiary of the IRA. She did not take her required minimum distribution (RMD) for 2025 before she died. He intends to do a spousal rollover by transferring the funds to his own IRA. Does he need to take the RMD prior to moving the funds?

Thank you!

Julie

Answer:

Hi Julie,

No, the husband can take the RMD after doing the rollover to his own IRA. That might be easier because it could be combined with his own 2025 RMD, which he must take from his existing IRA. In any case, he must take his wife’s 2025 year-of-death RMD by 12/31/26.

Question:

I am turning 73 years old in 2025. I am still working, so I know I don’t need to start taking required minimum distributions (RMDs) from my 401(k) because my plan has the “still working” provision. All of my IRAs have been converted to Roth IRAs. I do a backdoor Roth each year on January 1. My question is: Do I need to take an RMD on the $8,000 before I convert it to a Roth IRA?

Clinton

Answer:

Hi Clinton,

No. You would only have an RMD due for 2025 if you have a traditional IRA balance as of 12/31/24, but you did not have any traditional IRAs as of that date. As long as you convert the $8,000 before the end of the year, you will never have an RMD on those dollars, because lifetime RMDs are not required on Roth IRAs.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/year-of-death-rmd-and-rmd-on-backdoor-roth-todays-slott-report-mailbag/

By Ian Berger, JD
IRA Analyst

The One Big Beautiful Bill Act (OBBBA) signed into law on July 4, 2025, includes a new savings vehicle for children called “Trump accounts.” The rules surrounding these accounts are complicated, and many media outlets are reporting inaccurate information.

Several types of contributions can be made to Trump accounts.

Government Contributions

A one-time $1,000 contribution from the Federal government will be made to a Trump account for any child born between January 1, 2025, and December 31, 2028.

Private Contributions Before the Age-18 Year

A parent (or any other person) can contribute to a Trump account on behalf of a childin any calendar year before the year the child turns age 18. These contributions can be made even for children who do not qualify for the $1,000 government contribution (i.e., even if the child is born before 2025 or after 2028).

These contributions have special rules:

• Total annual contributions on behalf of a child can’t exceed $5,000, indexed for inflation starting in 2028. No contribution is allowed before July 4, 2026.
• Contributions must be after-tax (non-Roth) contributions. No deduction can be taken on these contributions.
• There is no requirement that the child have any compensation in order to have a contribution made on his behalf.
• Contributions (and earnings) cannot be withdrawn before the first day of the calendar year in which the child turns 18 years old. After the age-18 year, funds in the account can be withdrawn for any reason.
• Distributions after age 18 follow IRA withdrawal rules. Therefore, withdrawn contributions are tax-free, but earnings are subject to ordinary income tax and the 10% early distribution penalty, unless an exception to that penalty applies. (An earlier version of the OBBBA allowed for capital gains treatment under certain circumstances, but this was deleted in the final law.) Because of the “pro-rata rule,” a portion of each distribution will usually be taxable (and possibly subject to penalty).
• Funds can remain tax-deferred in the account until the normal IRA required beginning date for required minimum distributions (RMDs). (An earlier version of the OBBBA required withdrawals at age 31, but that was also removed.)
• Before the first day of the calendar year in which the child turns age 18, contributions must be invested in a low-cost mutual fund or exchange-traded fund that tracks the S&P 500 stock index or another index comprised primarily of U.S. companies.
• Contributions do not count towards IRA or workplace plan contribution limits.

Private Contributions On or After the Age-18 Year

Contributions can also be made to a Trump account in a calendar year on or after the year the child turns age 18. However, these contributions must follow the traditional (not Roth) IRA contribution rules. These rules include:

• Annual contributions cannot exceed the applicable dollar limit (for 2025, $7,000, and $8,000 for age 50 or older), and there must be earned compensation at least up to the amount of the contribution.
• Roth IRA contributions aren’t permitted. However, it appears that pre-age-18-year contributions (and earnings) could potentially be converted to a Roth IRA on or after the age-18 year.
• Contributions can be deductible if the individual is not an active plan participant in a workplace plan or, if he is an active participant, has modified adjusted gross income below the applicable phase-out dollar limit.
• Contributions (and earnings) can be withdrawn at any time but are subject to taxes and penalty like traditional IRAs. Accounts are subject to RMDs at the normal RMD age.
• Post-age-18-year contributions and earnings (along with all dollars contributed before the age-18 year) can be invested in any vehicle other than collectibles, life insurance and S-corporation stock (i.e., the same limitations as IRAs).

Other Contributions

OBBBA also allows for employer-provided contributions to Trump accounts for teenage employees and dependents of employees. Total contributions from this source are limited to $2,500, indexed for inflation starting in 2028. (OBBBA says that employer contributions count towards the annual $5,000 overall limit, but that may be a drafting error.) The legislation also permits contributions by the Federal government, any state government or any tax-exempt organization to a targeted group of children who have not turned age 18 by the end of the calendar year in which the contribution is made.

Stay Tuned

These accounts are expected to become available in 2026. Many details still need to be ironed out. In the meantime, you should consult with a knowledgeable financial advisor or tax professional to learn more about how a Trump account might fit into your financial plan. As always, stay tuned to the Slott Report for all the latest news and updates.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/how-trump-accounts-work/

By Sarah Brenner, JD
Director of Retirement Education

On July 4, 2025, President Trump signed into law the “One Big Beautiful Bill Act” (OBBBA). This mammoth domestic policy and tax law is hundreds of pages long and will impact many people in all kinds of ways. What does it mean for your retirement account? Here are 3 takeaways:

1. Rothification will continue. While OBBBA does not include any new Roth account provisions, it is likely that in its wake the trend of “Rothification” will continue. The reason is the need for revenue. Many experts believe that the passage of OBBBA will continue the trend of ballooning budget deficits. In the past, Congress has turned to Roth accounts in attempts to plug holes in in the budget. Why? Roth accounts are after-tax accounts and thus provide immediate revenue. For Congress, the future tax-free growth in these accounts is someone else’s problem.

   Back in 2017 during the tax reform debate, a proposal was made to increase revenue by pushing savers towards nondeductible Roth 401(k)s. This trend continued with SECURE 2.0 Act which now allows broader use of Roth-type plan accounts such as Roth SEP and SIMPLE IRA plans, and employer Roth 401(k) contributions. Also, beginning in 2026, 401(k) catch-up contributions must go to Roth 401(k)s when company wages exceed $145,000 in the prior year.

   In the aftermath of OBBBA, expect to see more Roth accounts as Congress grapples with budget and deficit concerns.

2. Conversion opportunities are expanded. For savers who are considering Roth conversions, OBBBA has removed a pending deadline. The 2017 Tax Cuts and Jobs Act’s lower tax rates were scheduled to sunset at the end of 2025. By eliminating this deadline and extending these rates into the future, OBBBA has opened the door to conversions in future years at today’s low tax rates. This changes the calculus for deciding whether to make Roth conversions. Also, OBBBA includes a number of new tax deductions (e.g., SALT, tips and overtime) that can be leveraged to lower the tax bill on a conversion.
3. Planning with tax-advantaged accounts will be more important than ever. Many of the new tax breaks that are part of OBBBA come with income limits. Smart planning with tax-advantaged accounts is one way to reduce income and thus preserve a deduction that otherwise would be lost. For example, a 75 year-old could do a qualified charitable distribution (QCD) from his IRA to both satisfy a required minimum distribution and preserve eligibility for the new extra $6,000 senior deduction. Or, a 25-year-old could make a deductible IRA contribution or health savings account (HSA) contribution and remain eligible for the new tax break on tip income by keeping her income under the phase-out range.

   Tax-advantaged accounts, like IRAs, 401(k)s and HSAs, provide a useful way for many individuals to lower their income, in some cases, even after the tax year is over. In the wake of OBBBA, this will become more valuable than ever.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/3-Retirement-Account-Takeaways-from-OBBBA

By Andy Ives, CFP®, AIF®
IRA Analyst

QUESTION:

With the signing of the “One Big Beautiful Bill Act” (OBBBA) legislation and the current tax rates being made permanent, have your thoughts regarding Roth conversions changed?

Jim

ANSWER:

Jim,

We have always been, and will continue to be, big proponents of Roth conversions. OBBBA does not contain any changes directly related to the IRA or retirement plan rules, nor is there anything in the law specifically about Roth accounts. However, the law does contain several new tax deduction opportunities that could allow for larger Roth conversions. As you mentioned, the current tax rates are extended “permanently” (until Congress decides to change them). This expands the opportunity to do Roth IRA conversions at low brackets for future years.

QUESTION:

I took a distribution from my Roth IRA. Can I roll the funds back into the same Roth IRA, or must I move the funds to a different Roth IRA?

ANSWER:

If you have not done any 60-day IRA-to-IRA or Roth IRA-to-Roth IRA rollovers in the previous 12 months, you can roll the assets back to the same Roth IRA account. There is no rule that says the assets must go to a different account. You will still receive a Form 1099-R showing the distribution and a Form 5498 showing the rollover.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/one-big-beautiful-bill-act-and-ira-rollovers-todays-slott-report-mailbag/

By Andy Ives, CFP®, AIF®
IRA Analyst

Hopefully Ed Slott and Company is your trusted, go-to source for all things IRA and retirement plan related. Let’s be clear about the “One Big Beautiful Bill Act of 2025” (OBBBA), enacted on July 4. There is no “SECURE 3.0” in this legislation. It does NOT contain any changes DIRECTLY related to IRA or retirement plan rules.

There is nothing in the law specifically about Roth accounts. Nothing about Roth SEP IRAs. Nothing about 529-to-Roth conversions, Roth IRA contribution limits or any of the Roth topics we typically write about. However, what the law does contain are several items that tangentially relate to our bailiwick. Most of it can be framed as more items to consider – and more opportunities – when it comes to Roth conversions. For example:

• The reduced federal individual income tax rates, originally enacted in the 2017 Tax Cuts and Job Act, are extended “permanently” (until Congress decides to change them). This expands the opportunity to do Roth IRA conversions at low brackets for future years.
• For 2025, the standard deduction increases to $15,750 (from $15,000) for individuals, and $31,500 (from $30,000) for married filing jointly (MFJ). There are annual inflation increases for subsequent years. This will expand the opportunity to do Roth IRA conversions.
• There is a new $6,000 addition to the standard deduction for seniors aged 65 and older for years 2025-2028. This is per person, so a married couple could deduct up to $12,000 if each spouse is aged 65 or over. This is in addition to the regular standard deduction AND the extra deduction for those aged 65 or blind. This will expand the opportunity to do Roth IRA conversions. (Note that the deduction phases out beginning with modified adjusted gross incomes of $75,000 for individuals and $150,000 for those MFJ. It phases out completely at $175,000 and $250,000, respectively.)
• For those who itemize, the state and local tax (SALT) deduction is increased to $40,000, effective for 2025-2029, with a 1% increase each year. In addition, some pass-through business owners can work around the $40,000 limitation and get unlimited SALT deductions. More deductions could expand the opportunity to do more Roth IRA conversions.

• Taxpayers taking the standard deduction will now be able to make deductible charitable contributions, up to $1,000 for individuals and $2,000 for those MFJ. This could expand the opportunity to do more Roth IRA conversions.
• There are now tax deductions for tips and overtime. While there are caps and phase outs, this could expand the opportunity to do more Roth IRA conversions.
• The Child Tax Credit is permanently increased to $2,200 per child (effective in 2025), with annual inflation increases. Income limits remain the same at $200,000 (individuals), and $400,000 (MFJ). Guess what? More deductions could expand the opportunity to do more Roth IRA conversions.

Have I been repeating myself? If so, my apologies. Oh, and one more thing…Did you know that there are now more opportunities to do larger Roth conversions?

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/obbba-no-ira-changes-but-more-roth-conversions/

By Ian Berger, JD
IRA Analyst

Most company retirement savings plans, such as 401(k), 403(b) and 457(b) plans, are allowed to (but not required to) offer plan loans. According to a survey by the Employee Benefits Research Institute, as of the end of 2022, 52% of 401(k) plans allowed loans, while 84% of 401(k) participants were in plans offering them. Loans are not allowed from IRAs, SEP IRA plans or SIMPLE IRA plans.

Plan loans are generally limited to the lesser of 50% of your vested account balance, or $50,000. Your employer can allow an exception to this rule: If 50% of your vested account balance is less than $10,000, you can still borrow up to $10,000.

Example 1: Bonnie participates in a 401(k) plan that allows loans. Her vested account balance is $16,000. If the plan doesn’t allow the exception, the most Bonnie can borrow is $8,000. If the plan allows the exception, she can borrow up to $10,000.

Many plans limit participants to one outstanding loan at a time. But some plans do allow participants to take out a second loan while one remains outstanding. The amount of a second loan is limited by the outstanding balance of the first loan.

Generally, you must repay a plan loan within 5 years. But a loan used to purchase your principal residence can have a longer repayment period, usually 10 or 15 years. Loans must be repaid in substantially equal amounts made at least quarterly. Most plans require repayment through payroll deduction.

Here are some advantages of plan loans:

• If offered by the plan, they are usually available at any time and for any reason.
• As long as the loan satisfies the above rules, it isn’t a taxable distribution or subject to penalty.
• They don’t require a credit check, and the application process is simple and quick.
• They usually offer better interest rates than a commercial loan. Also, repayments are made back to your account – not to a bank.

Here are some disadvantages:

• Amounts borrowed are unavailable for investment growth within the plan.
• If you leave your employer with an outstanding loan balance that you can’t pay off, your plan account will be offset by the loan balance. That balance is considered a distribution subject to tax and possible penalty. You can avoid the tax hit if you can come up with the funds to roll over the unpaid balance to an IRA. The rollover deadline is October 15 of the year following the year the offset occurs.

Example 2: Clyde, age 50, terminates employment on July 15, 2025, with a $50,000 401(k) account balance and a $20,000 outstanding loan balance. Clyde does not have the funds to repay the loan balance. On August 15, 2025, the plan offsets his $50,000 account balance by the $20,000 loan balance and distributes $30,000 to him. He rolls over the $30,000 to an IRA within 60 days. Clyde has until October 15, 2026, to find other sources to replace the $20,000 so he can complete a full rollover. Otherwise, he will owe taxes on the $20,000 and a 10% early withdrawal penalty of $2,000 for 2025.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/how-company-plan-loans-work/

By Sarah Brenner, JD
Director of Retirement Education

Question: Can an IRA beneficiary do a 60-day rollover?

Answer: Only a spouse beneficiary can do a 60-day rollover from an inherited IRA if the funds are moving into an IRA in her own name. If a nonspouse beneficiary takes a distribution from an inherited IRA, those funds cannot be rolled over. A nonspouse beneficiary can move funds from one inherited IRA to another, but this must be done by a direct transfer.

Question: I am age 57 and retiring this year. I know there is an exception to the 10% early distribution penalty when someone separates from service in the year they reach age 55 or later. I also know this exception does not apply to IRAs. I understand that if I roll over some funds to the IRA, then I can’t use the exception when taking a distribution from the IRA. However, if I leave other funds in my employer plan, can I still use the exception when withdrawing those other funds?

Answer: Yes, the age 55 exception would be available for the funds left in the plan even though it would not be for the funds rolled to the IRA. However, you will need to check with the plan to see if they will allow a partial distribution with the remainder of the funds staying in plan. Some plans will not allow this.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/60-day-rollovers-and-the-age-55-exception-todays-slott-report-mailbag/

By Sarah Brenner, JD
Director of Retirement Education

When retirement account funds are on the move, things do not always go as planned. The best way to move these funds is to do so directly, but that may not always be possible. It is very common for money to be moved between retirement accounts by using 60-day rollovers. Unfortunately, the 60-day rollover deadline is often missed.

Fortunately, there is a way to fix these mistakes. You can complete a late 60-day rollover of retirement funds using a self-certification procedure. Here are 10 things you should know about this procedure:

1. Self-certification is available for missed 60-day rollover deadlines for both IRAs, including Roth IRAs, SEP IRAs and SIMPLE IRAs, and company plan accounts.
2. This procedure can provide an immediate and cost-free fix for a missed rollover deadline, potentially saving you from taxes, penalties, and the loss of tax-deferral or tax-free status of your retirement savings.
3. To qualify, you cannot have been previously denied a waiver by the IRS and the reason for your late rollover must be one from a list of 12 specific reasons approved by the IRS. Among the most common of these 12 reasons are serious illness and mistakes by the financial institution.
4. There is no “miscellaneous” or “other” category when it comes to the self-certification process. If you are late for a reason that is not one of the 12 listed ones, you would still need to go through the process of filing a private letter ruling (PLR) to seek relief.
5. You must redeposit the funds in a retirement account as soon as possible after the reason (or reasons) no longer prevent you from making the contribution. There is a 30-day safe harbor window to meet this requirement.
6. You must make a written certification to the plan administrator or IRA custodian that a contribution satisfies the conditions for a waiver. The IRS has even provided a model letter that should be used for this written certification requirement.
7. Self-certification is not a waiver by the IRS. You are not necessarily completely off the hook. You are allowed to report a contribution as a valid rollover on your tax return, but the IRS can still later audit your return and determine that a waiver was not appropriate.
8. Late rollovers through self-certification will be on the IRS’ radar. Reporting from the IRA custodian will tip off the IRS that a late rollover has occurred.
9. If you violate another rollover rule other than missing the deadline, you are out of luck. The self-certification process will not help you. For example, if you do more than one IRA-to-IRA or Roth IRA-to-Roth IRA 60-day rollover in a 12-month period, this mistake cannot be fixed with self-certification.
10. While self-certification is helpful, your best bet to avoid missing the 60-day deadline, as well as other rollover errors, is to stick with trustee-to-trustee transfers and direct rollovers when you are looking to move your retirement funds.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/10-things-you-should-know-about-fixing-late-rollovers-with-self-certification/

By Andy Ives, CFP®, AIF®
IRA Analyst

The pro-rata rule dictates that when an IRA contains both non-deductible (after-tax) and deductible (pre-tax) funds, then each dollar withdrawn (or converted) from the IRA will contain a percentage of tax-free and taxable funds based on the ratio of after-tax funds vs. the entire balance in all your IRAs. When there is a mix of pre- and after-tax dollars, you cannot withdraw (or convert) just the non-deductible funds and pay no tax.

When we say “all of your IRAs,” we mean that the pro-rata rule looks not only at a person’s traditional IRAs, but also at any SEP and SIMPLE plans that he may also own. For the pro-rata rule, the IRS considers all of these accounts as one big bucket of money. You cannot “shield” certain dollars by moving them to their own separate account at a different custodian. Note that inherited IRAs, Roth IRAs and work plans, like a 401(k), are NOT factored into the pro-rata math.

Now that we know which accounts will be involved, how does the pro-rata math work? Using a round-number example, assume a person (Ralph) has a $100,000 IRA. Ralph does not own any other IRAs, SEP or SIMPLE plans. Within this $100,000 IRA, there is $10,000 of after-tax (non-deductible) money. How those after-tax dollars got there is irrelevant. Maybe they were rolled over from a work plan. Maybe Ralph made non-deductible contributions over the past few years. Regardless, Ralph wants to do a partial Roth conversion.

The ratio of pre-tax to after-tax dollars in this $100K IRA is 9:1. As such, the pro-rata rule dictates that ANY Roth conversion Ralph does will be 90% taxable. This is true if Ralph converts $20,000, $50,000 or the whole account. Ralph cannot cherry pick the $10,000 of after-tax dollars and only convert those.

Ralph instructs his financial advisor to process a $10,000 Roth conversion. Based on the pro-rata rule, Ralph will owe tax on $9,000 of this conversion. Ralph is not a happy camper. He complains to his advisor that “This is double tax! I already paid tax on that $10,000, and now I’m paying it again.” Ralph’s financial advisor calmly explains the situation and walks Ralph off the proverbial ledge. In fact, Ralph is not paying “double tax” as he feared.

The Explanation: As mentioned, with Ralph’s $10,000 Roth conversion, we cannot convert only the $10,000 of after-tax dollars. Based on Ralph’s 9:1 ratio, we carve off $9,000 from the pre-tax portion of his IRA balance and carve off another $1,000 from the after-tax portion of his IRA. These are the dollars that get converted, and Ralph pays tax on $9,000 of his pre-tax funds.

After the conversion, Ralph has a $10,000 Roth IRA that is all after-tax dollars. What remains in Ralph’s traditional IRA? The balance is down to $90,000. Since we took $9,000 of the pre-tax dollars and $1,000 of the after-tax dollars for the conversion, the mix in his traditional IRA is now $81,000 pre-tax, and $9,000 after-tax. And what is that ratio? Still 9:1.

Combined (traditional + Roth IRA), Ralph still has $100,000. Between the two IRAs, Ralph now owns $19,000 of after-tax dollars. There was no “double tax” on the $10,000. Pro-rata simply carved off a percentage of each type of dollar (pre-tax and after-tax) and converted the proportionate amount.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/pro-rata-not-double-tax/

By Ian Berger, JD
IRA Analyst

Question:

I am over age 59½ and have had a Roth IRA account for more than 5 years. Starting in 2025, I designated all of my contributions into my employer’s 401(k) plan as Roth contributions. If I decide to retire before I have met the 5-year requirement for the Roth 401(k) and roll over this balance to my existing Roth IRA account, which 5-year clock applies to those former Roth 401(k) dollars?

Thanks for taking my question!

Lois

Answer:

Hi Lois,

The Roth IRA clock will apply. Since you are over age 59½ and you’ve had a Roth IRA for more than 5 years, any distribution from your Roth IRA (including all earnings) will be tax and penalty-free. That includes distributions of Roth 401(k) funds that you have rolled over.

Question:

Dear Ed Slott and America’s IRA Experts,

I have a rollover traditional IRA that was set up when I left my last job. I am no longer employed, so don’t have any earned income. My husband works full time and we file married/filing joint.

Can I contribute to a newly established traditional IRA account and then convert to a Roth IRA for tax year 2024? When I convert the contribution from the new traditional IRA to a Roth IRA, do I have to consider the assets in the rollover traditional IRA and calculate the taxes on a pro-rata basis? Or do I calculate taxes owed on the backdoor Roth using only the contribution from the new traditional IRA? Lastly, is this conversion strategy limited by income levels?

Thank you and looking forward to hearing from you.

Sincerely,

Anna

Answer:

Hi Anna,

Assuming your husband has enough compensation, you can make a spousal IRA contribution based on his compensation. However, it is too late to make a contribution for 2024. Since you are inquiring about a backdoor Roth IRA, I assume your husband’s income is over the married/filing joint threshold ($236,000 – $246,000 for 2025) for contributing directly to a Roth IRA. If you make a non-deductible IRA contribution for 2025 and want to do a Roth conversion, the pro-rata rule will require you to take into account your existing rollover traditional IRA. Therefore, a part of that conversion will be taxable. There are no income limits on doing Roth conversions.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/the-roth-5-year-clock-and-the-pro-rata-rule-todays-slott-report-mailbag/

By Ian Berger, JD
IRA Analyst

If you’re in a 457(b) plan and are nearing retirement, you may want to consider an often-overlooked rule that could allow you to defer twice the usual annual elective deferral limit (for 2025, $23,000 x 2 = $47,000) in the three years before retirement.

This almost-too-good-to-be-true opportunity is sometimes called the “2x catch-up” or the “3-year special catch-up.” It’s available if you are in either of the two types of 457(b) plans: governmental plans for state and local municipal workers, and non-governmental plans for key management and other high-paid employees of tax-exempt employers like hospitals and universities. (The latter plan is often referred to as a “top-hat” plan.)

It should come as no surprise that there are limitations on the 2x catch-up. First, plans do not have to offer it, although most do. Also, this is a true catch-up contribution, since any prior elective deferrals to the 457(b) will offset it. In other words, the only way you can defer exactly twice the deferral limit is if you haven’t previously put away any funds in the plan. Finally, if you’re a municipal worker, you can’t use the 2x catch-up in the same year you also use the age-50-or-older catch-up or the “super catch-up” for ages 60-63. (Note that neither the age-50-or-older catch-up nor the super catch-up is available if you’re in a top-hat plan.)

The 2x catch-up can be done in the 3 calendar years before the employee reaches his “normal retirement age.” That term should be defined in the 457(b) plan document. IRS rules say that the plan can define “normal retirement age” as any age chosen by the employee that is between 65 and 70½. (If you’re in a defined benefit pension plan, an earlier age may be possible.) So, you can normally make the 2x catch-up in the three calendar years before an age you choose that is between 65 and 70½. (In some cases, the plan will designate a uniform normal retirement age in that range without allowing you to choose.)

Starting next year, certain highly-paid employees in municipal 457(b) plans (as well as in 401(k) or 403(b) plans) who want to make catch-up contributions will have to make them as Roth contributions. (If the plan does not offer Roth contributions, these high-paid individuals won’t be able to make any catch-up contributions at all.) Does this rule apply to the 2x catch-up? The IRS says no – except in the highly unusual situation where your age-50-or-older catch-up limit is higher than your 2x catch-up limit. In that case, catch-up contributions up to the 2x catch-up limit don’t have to be made on a Roth basis. Only catch-ups over the 2x limit have to be Roths.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/double-your-pleasure-the-457b-2x-catch-up/

By Sarah Brenner, JD
Director of Retirement Education

The year 2025 has been a turbulent time for the economy. Whether due to job loss or persons seeking better investment opportunities in volatile markets, retirement account funds are on the move more than ever. Fortunately, portability between different types of retirement accounts has expanded, creating more options for those relocating their money.

If you are among the growing number of savers choosing to use Roth accounts for retirement savings, you may have questions when it comes to moving your money.

Roth Options

As Congress expands the universe of Roth accounts, more options are available when it comes to moving retirement funds. Designated Roth plan accounts (such as Roth 401(k)s, 403(b)s, and governmental 457(b) plans) can be rolled into Roth IRAs or other Roth plan accounts, if the receiving plan allows.

Roth IRA funds can be moved to other Roth IRAs, but Roth plans cannot accept Roth IRA funds. Although no one should want to do this, a Roth account cannot be rolled over or transferred to a non-Roth account, such as a traditional IRA or qualified plan.

Roth SEP and Roth SIMPLE IRAs, which were established by the SECURE 2.0 Act, are slowly becoming more available as the arrival of IRS guidance has led to more custodians allowing these options. These accounts are subject to portability rules similar to those for non-Roth SEP and SIMPLE IRAs.

The Right Roth Moves

Once an individual understands the options for moving Roth funds, the next step is to complete the move correctly. The best way to ensure this happens properly is to move the retirement account funds directly from one Roth retirement account to another. Moving your Roth money directly avoids all sorts of complications and problems that come along with moving the funds indirectly (that is, by taking a distribution and then doing a 60-day rollover).

From work plans like a Roth 401(k), this means doing a direct rollover to another plan or to a Roth IRA. Instead of opting to receive the funds, the participant instructs the plan to send the funds directly to the receiving retirement account. A check made payable to the receiving plan administrator or Roth IRA custodian also qualifies as a direct rollover, even if it is sent to the plan participant for forwarding.

For Roth IRA funds, the best way to move money is by doing a direct transfer (if possible). The Roth IRA custodian would send the funds directly to the new account without the account owner ever taking receipt of the funds. Alternatively, a check could be made payable to the new Roth IRA custodian and sent to the Roth IRA owner for forwarding.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/moving-your-roth-account/

By Sarah Brenner, JD
Director of Retirement Education

Question:

I am age 85, and my wife is age 75. If I die first and my wife inherits my IRA, are the required minimum distributions (RMDs) that my wife must take after my death calculated using her age or my age?

Richard

Answer:

Hi Richard,

If your wife inherits your IRA, she can do a spousal rollover to her own IRA or keep the account as an inherited IRA. With either option, the RMDs will be calculated using her life expectancy. The IRS Uniform Lifetime Table is used if she does a spousal rollover. New rules under the SECURE 2.0 Act would allow her to use that table for an inherited IRA as well.

Question:

Good day folks! I have an old stretch inherited IRA and would like to do a qualified charitable distribution (QCD) with part of my RMD.  Any problems with this idea?

Thank you, and I really enjoy the webinars!

Jim

Answer:

Hi Jim,

Glad you are enjoying Ed’s webinars!

Beneficiaries can do QCDs from inherited IRAs. However, the beneficiary must be age 70½ or older. If you qualify, you can do a QCD from your inherited IRA.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/rmd-calculations-and-qualified-charitable-distributions-todays-slott-report-mailbag/

By Andy Ives, CFP®, AIF®
IRA Analyst

Before he transformed into the Incredible Hulk, Bruce Banner once said to his antagonist, “Don’t make me angry. You wouldn’t like me when I’m angry.” That’s a little how I feel when I hear stories about lazy financial professionals giving bad advice. Not that I’m about to turn green and rip through my clothes, but I do feel my blood start to boil.

A member of Ed Slott Elite IRA Advisor Group^SM (Elite Advisor) called me the other day with a frustrating story. He met a relatively young widow (age 55) and they discussed her financial situation. Her husband recently passed away, leaving his 401(k) valued at around $1 million. Another less experienced advisor had the widow move the 401(k) into an IRA in her name via spousal rollover. This is a perfectly acceptable transaction, but it was definitively the WRONG advice in this case. Why?

The Elite Advisor learned that the young widow needed some of the $1 million for daily living expenses. However, doing a spousal rollover eliminated her ability to withdraw from the IRA without a 10% early distribution penalty. Unfortunately, once a spousal rollover is completed, there is no going back. There is no transaction available to reverse what had been done. Adding to the misery, the other advisor told the widow that if she chose any other option, she would be forced to withdraw all $1 million within 10 years.

The Elite Advisor knew this was false. Just plain wrong. When he called to share the story and to see if there was a path forward…that’s when the Hulk inside me began to stir.

What was the proper guidance in this situation? Instead of doing a spousal rollover, the young widow could have established an inherited IRA. With an inherited IRA, all distributions avoid the 10% early withdrawal penalty. Yes, these distributions are taxable, but the widow would have had total access to all $1 million, free and clear of any penalty. Additionally, there would be no annual required minimum distributions (RMDs) from this account. Spouse beneficiaries are allowed to delay RMDs on an inherited IRA until the deceased spouse would have been RMD age. Finally, when the widow turned age 59½ in a few years, she could have then done a spousal rollover. There is no deadline to do a spousal rollover after first electing an inherited IRA. Since the widow would be over age 59½, the 10% early withdrawal penalty would no longer apply, so she could then move the inherited IRA into her own name.

Frustrated by the actions of a less knowledgeable professional, the Elite Advisor and I put our heads together. There was no unwinding the spousal rollover. There was no other 10% penalty exception to which the widow could qualify. The “emergency expense” exception ($1,000) would not be enough to meet her monetary needs. So, as the only option, the decision was made to implement a 72(t) substantially equal periodic payment program.

The Elite Advisor will properly install the payment program by splitting the IRA and leveraging the highest possible interest rate…but that is another story. For now, the young widow is in good hands. Recognize that not all financial professionals are created equally. Some are superheroes, here to serve, with superior training, experience and knowledge. Seek them out.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/bad-advice-turns-me-into-the-hulk/

By Ian Berger, JD
IRA Analyst

You are not alone if you have concerns that your IRA or workplace plan savings could be lost if you are forced to declare bankruptcy or wind up on the losing end of a civil lawsuit. After all, we all count on those savings for a financially secure retirement. Fortunately, there is usually some degree of creditor protection for retirement accounts. Unfortunately, that doesn’t seem to be the case for SEP and SIMPLE IRA plan funds. Those accounts may not always be protected against creditors.

Let’s start with the good news. If you must declare bankruptcy, your SEP and SIMPLE IRA accounts can’t be reached by bankruptcy creditors. That’s because the federal Bankruptcy Code provides a complete shield for those funds. Traditional and Roth  IRAs are also protected under the Bankruptcy Code, but that law imposes a dollar limit on the amount of IRA funds that are free from creditors. That dollar limit is indexed every three years based on the cost-of-living. On April 1, 2025, the dollar limit increased from $1,512,350 to $1,711,975, effective through March 31, 2028. Importantly, this dollar limit does not take into account amounts rolled over from employer plans like 401(k)s.

Unfortunately, the news is not as good for SEP and SIMPLE IRAs when non-bankruptcy creditors come after those funds after winning a lawsuit. Many workplace retirement plans are shielded from these creditors because the plans are covered by the federal ERISA law, which usually provides rock-solid protection.

SEP and SIMPLE IRAs are technically considered ERISA retirement plans. So, what’s the problem? The problem is that ERISA denies those plans the complete protection against general creditors that it gives to other employer plans. (The language in ERISA is not crystal-clear, but that’s how courts have interpreted it.)

Some states have their own laws intended to provide a state shield against general creditors trying to reach SEP and SIMPLE IRA accounts. That would seem like another way to protect those monies from non-bankruptcy creditors. But, again, no luck. ERISA has a provision that says, for ERISA-covered plans, any state law that “relates to” ERISA retirement plans is disallowed. (The fancy word is “preempted.”) State creditor protection laws clearly “relate to” SEPs and SIMPLEs, which are ERISA plans.

So, when it comes to non-bankruptcy creditor protection, SEP or SIMPLE IRA owners may be stuck between a rock and a hard place. They do not have federal protection because ERISA has a carve-out for SEP and SIMPLE IRA plans. And they don’t have state protection because state creditor protection laws apparently cannot apply to ERISA plans like SEPs and SIMPLEs. This was exactly the conclusion of a 2002 federal appeals court decision (Lampkins v. Golden) that covered residents of Kentucky, Michigan, Ohio and Tennessee. There haven’t been any similar court decisions covering residents of other states, but those residents also may be out of luck.

What to do? If you have a SEP or SIMPLE IRA and are concerned about creditors, consider moving those funds to an IRA, where you will likely receive at least some state creditor protection. Owners of businesses with SEPs or SIMPLEs who have creditor concerns may want to consider terminating those plans in favor of 401(k)s, where again the funds will likely be better protected.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/are-my-sep-and-simple-iras-safe-from-creditors/

By Andy Ives, CFP®, AIF®
IRA Analyst

QUESTION:

Hello,

I have two IRA annuities with different insurance companies. One of my annuities is maturing and I would like to transfer it upon maturity to a different insurance company. Do I need to take my 2025 required minimum distribution (RMD) from the current insurance company prior to transferring the funds to a new insurance company offering a higher rate, or can I take it after the transfer?

Thanks

Mary

ANSWER:

Mary,

There are two ways to move IRA money between custodians. One is via 60-day rollover. With a 60-day rollover, the funds are paid directly to you for delivery to the other firm. RMDs cannot be rolled over. So, if you proceed with moving the money as a 60-day rollover, the RMD must be retained before the rest of the balance can be rolled over. The second (and safer) way to move money is by direct transfer. With a direct transfer, the funds are sent directly to the receiving custodian. (A check made payable to the receiving insurer that is sent to you for delivery also qualifies as a direct transfer.) With a direct transfer, you can move the entire IRA and then later withdraw the RMD from the new custodian/insurance company. However, some insurance companies apply their own internal rules when it comes to transferring IRA money, so be sure to verify with the insurance provider on how to best proceed.

QUESTION:

I am 71 years old and am picking up a part-time job. I have nothing in an IRA currently. Can I contribute to an IRA at this age?  If so, can I then do a qualified charitable distribution (QCD) from this IRA account?

Thanks!

Tim

ANSWER:

Tim,

If you have taxable earned income from this part-time job, then yes, you can contribute to an IRA. There are no age restrictions for IRA eligibility. Once the funds are in the IRA, you can then complete a QCD. However, BE CAREFUL! You cannot take a deduction for the IRA contribution and also receive the benefits of a QCD. The IRS considers this double dipping and would require you to offset (make taxable) a portion of the QCD equal to the amount deducted for the IRA contribution. A better idea might be to contribute to a Roth IRA and make a separate (non-QCD) donation to the charity.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/ira-transfers-and-qualified-charitable-distributions-todays-slott-report-mailbag/

By Sarah Brenner, JD
Director of Retirement Education

Here at the Slott Report we hear many stories about trusts being named as IRA beneficiaries and the problems that follow. Often, there seems to be no purpose for naming the trust and it brings unnecessary complications. Trusts won’t help with income taxes. In fact, they can increase the tax hit because IRA funds may be subject to high trust tax rates.

Naming a trust is not something that should be done without a clear purpose. Here are six good reasons to name a trust as an IRA beneficiary:

1. Minor Beneficiaries. When there are minor children involved, naming a trust can be a good plan. Having a minor be named directly on a beneficiary form is a recipe for disaster because a minor cannot legally conduct business on the account. It may be possible in some cases to name a Uniform Trust for Minors (UTMA) or Uniform Gift to Minors (UGMA) account as an IRA beneficiary, but not all custodians allow this. Also, these accounts don’t offer the ability to control funds after the minor reaches the age of majority the way a trust can. Especially with larger IRAs, when minors are involved, naming a trust as the beneficiary may be necessary.
2. Special Need Beneficiaries. For special needs beneficiaries, a trust is essential to manage money and to protect government benefits when IRA funds are inherited. A special needs trust drafted to comply with the SECURE and SECURE 2.0 rules can still use the stretch instead of the 10-year rule, allowing payments to be paid out over the life expectancy of the special needs beneficiary.
3. Substance Abuse Issues. No IRA owner would want to see their life’s savings support a beneficiary’s drug problem or gambling addiction. By naming a trust as beneficiary, instead of naming a beneficiary with substance abuse issues directly on the account, controls can be put in place to ensure this does not happen.
4. Vulnerable Beneficiaries. There is no shortage of con artists and scammers looking to take advantage of vulnerable or naïve beneficiaries with large inheritances. To protect these individuals, naming a trust as the IRA beneficiary can be extremely useful for limiting access and warding off those with malicious intent.
5. Divorce Concerns. While most people love their children and grandchildren, they may not feel as warmly towards the people their offspring marry. There may be concerns about money ending up in the wrong hand if marriages go south and there is divorce. A trust named as an IRA beneficiary can alleviate these concerns.
6. Creditor Protection. Inherited IRAs are not protected under federal law either in bankruptcy or from other creditors. There is some protection under state laws, but this can vary. A trust can help shield IRA funds from the beneficiary’s creditors.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/when-you-should-name-a-trust-as-ira-beneficiary/

By Andy Ives, CFP®, AIF®
IRA Analyst

We know that required minimum distributions (RMDs) cannot be rolled over or converted. Before a person does any Roth IRA conversions, all of their IRA RMDs must be satisfied. (See this prior Slott Report post: “New Rule: All IRA RMDs Must Be Satisfied Prior to Doing a Roth Conversion.”)

But what if an RMD does get erroneously converted? Is there a fix? Yes.

Before we discuss the “fix,” note that there is often a misconception that a converted RMD is a missed RMD. This is not the case. The RMD was taken from the traditional IRA, so no 25% penalty for missing the RMD would apply. Instead, a converted RMD is technically an excess contribution in the Roth IRA, so we follow the excess contribution correction rules. The deadline to fix an excess contribution with no penalty is typically October 15 of the year after the year of the excess. That means that an excess contributions made in 2024 can be corrected with no 6% penalty up until October 15, 2025. If the deadline is missed, then the 6% penalty will apply for every year the excess remains in the account as of December 31. (For example, an excess contribution made in 2024 that is identified and corrected in November of 2025 will have a 6% penalty for 2024 only, because the excess was in the account on December 31, 2024, but removed by December 31, 2025.)

What about the earnings on the excess contribution while it was illegally in the IRA? Again, we look to the same October 15 deadline in the year after the year of the excess. If the excess contribution is corrected PRIOR to the deadline, the earnings attached to that excess (the “net income attributable,” or “NIA”) must also be removed. If the excess is corrected AFTER the deadline, the NIA (the earnings) can remain in the account. (This is a little odd, but true.)

So, let’s get back to the erroneously converted RMD. In our scenario, the account holder has identified his mistake prior to the October 15 deadline. As such, he is required to remove the excess amount, plus the NIA. Where does he go next?

IRS Publication 590-A provides a worksheet to calculate the earnings on an excess contribution (in this case, on the erroneously converted RMD). The NIA formula is not complicated. You will need to know the account balance immediately before the excess was contributed and the balance on the day the excess is withdrawn. The NIA is determined based on the performance of the entire IRA, not just the investment where the excess was placed. (For example, saying the excess contribution was “sitting in a cash position” within the IRA while the rest of the portfolio skyrocketed does NOT allow the account owner to minimize the NIA.)

Once the NIA is determined, the excess (in this case, the converted RMD) and the NIA must be withdrawn and labeled as an “excess contribution withdrawal.” This will ensure proper coding on the Form 1099-R. Since this correction was made prior to the October 15 deadline, there is no 6% penalty and no need to file any special tax forms (i.e., no Form 5329). However, the earnings will be taxable. How will the taxpayer know what the taxable NIA is? The 1099-R will report a gross distribution in Box 1, and a taxable amount (the NIA) in Box 2a.

A converted RMD is not the end of the world if it is promptly identified and corrected.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/fixing-a-converted-rmdand-the-tax-reporting/

By Ian Berger, JD
IRA Analyst

Question:

Recently, I’ve received dozens of emails suggesting that traditional IRA owners can convert to a Roth IRA and somehow avoid all or some tax. Is this a scam?

Thank you in advance.

Bill

Answer:

Hi Bill,

There is no way for traditional IRA owners to avoid having funds converted to Roth IRAs count as taxable income in the year of conversion. The schemes that are being marketed do not mention that fact. Instead, a typical scheme entices individuals to put their money into investments that supposedly will produce enough deductions to offset the Roth conversion taxable income. That way, the Roth conversion will be “tax-free.” Our advice is to tread carefully. Do not take the bait without speaking to a knowledgeable financial advisor.

Question:

Hello,

I understand that I can take Health Savings Account (HSA) distributions in a year other than the year that I incurred a qualified medical expense. There is confusion and conflicting opinion, however, on what that distribution can be used for. Must it be for a qualified medical expense to be tax and penalty free? For example, if I paid $4,000 out of pocket for various qualified medical expenses in 2022, may I take a tax- and penalty-free distribution of $4,000 from my HSA in 2025 to go on vacation? I have the receipts as proof of paying out of pocket for the 2022 medical expenses. Wouldn’t the $4,000 distribution just be reimbursing myself and I can use the money as I choose?

Thank you.

Caroline

Answer:

Dear Caroline,

You are correct. Often, HSA funds are used to pay qualified medical expenses directly. However, that is not required. Instead, you could first pay for those expenses out of pocket and then have the HSA reimburse you — even in a later year. You could then use the reimbursed money for any reason. If you do that, make sure to retain good records of the medical expense and proof of your payment. This will establish that the HSA distribution should not be taxable or subject to penalty in case you are questioned by the IRS.

https://irahelp.com/slottreport/roth-conversions-and-hsa-distributions-todays-slott-report-mailbag/

By Sarah Brenner, JD
Director of Retirement Education

Question:

Hello,

I have a question concerning inherited Roth IRAs. I know that in the past you have said that no annual required minimum distributions (RMDs) are required for these accounts. Does this include Roth IRAs that were inherited prior to the SECURE Act changes?

There is so much confusion about Roth IRA RMDs, so I wanted to be sure.

Thank you!

Answer:

You are right that there is a lot of confusion about when annual RMDs are required from inherited Roth IRAs! We often get questions on this topic.

If a Roth IRA was inherited prior to 2020 (before the SECURE Act), and the beneficiary was taking distributions over their life expectancy, those annual distributions must continue. Similarly, if a Roth IRA is inherited in 2020 or later and the beneficiary is an eligible designated beneficiary who is taking RMDs over his life expectancy, annual RMDs would be necessary.

However, if the Roth IRA beneficiary is subject to the SECURE Act’s 10-year rule, no annual RMDs are required during years 1-9 of the 10-year period.

Question:

Our client is age 78, and she has not taken her 2025 required minimum distribution (RMD) from her IRA yet. Can she transfer this IRA to a new institution without taking the RMD first?

Answer:

Yes, your client can go ahead and transfer the IRA to a new institution without first taking her 2025 RMD. There is a rule that says when an IRA owner does a 60-day rollover, the RMD must be taken prior to the rollover. However, this rule does not apply to direct transfers of IRA funds. She can transfer the entire amount. She just will need to remember to take her 2025 RMD from the new institution by December 31, 2025.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/inherited-roth-iras-and-ira-transfers-todays-slott-report-mailbag/

By Andy Ives, CFP®, AIF®
IRA Analyst

Regardless of the topic, we could all use an occasional refresher. Retirement account rules are incredibly complicated, and we all have our blind spots. Even seasoned financial advisors with extensive client lists can overlook certain details. I had a conversation recently with a respected professional who was operating on a misconception regarding the still-working exception. Fortunately, we were able to identify the oversight and make the necessary corrections. But the conversation confirmed, once again, that understanding the rules is paramount to success.

For those who have 401(k) or other employee retirement plan funds, the required beginning date (RBD) for starting required minimum distributions (RMDs) is the same April 1 as for IRA owners, unless they are still working for the company where they have the plan. If they do not own more than 5% of the company in the year they reach their RMD age and the plan allows, workers can delay their RBD to April 1 of the year following the year they finally retire. This is called the “still-working exception” to the RBD, but it only applies to RMDs from employer plans. It does NOT apply to IRAs or IRA-based work plans like SEPs and SIMPLEs. It also does not apply to employer plans if the individual is not currently working for that company.

The first misconception about the still-working exception is about the date when a person retires. A worker must be employed for the entire year for the exception to apply for that year.

Example: Mary, age 75, has an IRA and a 401(k) plan and is still working for the company that sponsors the 401(k). She never owned more than 5% of that company. Mary can delay distributions from her 401(k) until April 1 of the year following the year she retires. (The exception does not apply to her IRA.) Mary leaves her job after working her last day on December 31, 2025. She thinks that since she worked the “full year,” she has “retired” in 2026 and therefore can avoid taking the 2025 RMD from her 401(k). Such is not the case. It appears that retiring on December 31 is not good enough when it comes to the still-working exception and delaying RMDs. The RMD will be due for that same year for anyone whose last day of work is December 31. In the case of the still-working exception, it behooves a worker to hang on for one more day and “retire” on January 1.

Another misconception about the still-working exception is how an RMD can apply “retroactively.” If a person is leveraging the still-working exception and, therefore, has no RMD to worry about, that worker can roll over his entire 401(k) to an IRA (assuming the plan allows for in-service distributions). However, if the worker is laid off later that same year, or if he abruptly retires for whatever reason, then the RMD applies for that year. If he already did a full rollover of the plan assets to an IRA that same year, then this springing “retroactive” plan RMD is now an excess contribution in the IRA. This is not the end of the world as there is a relatively easy fix: remove the excess contribution (the plan RMD) from the IRA, plus any earnings attributable to those dollars. There is no penalty if the error is corrected by October 15 of the year after the year of the excess (although the earnings will be taxable).

Be careful with the still-working exception. The governing rules can be sneaky.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/misconceptions-about-the-still-working-exception/

By Andy Ives, CFP®, AIF®
IRA Analyst

QUESTION:

Thank you for all you do to educate the public. I’m hoping you guys can settle a debate that’s been going on with a few financial advisors and CPAs regarding the 5-year rule for Roth IRA conversions. I was under the impression that a non-taxable conversion can be withdrawn at any time, even within 5 years of the “backdoor” contribution/conversion, without a 10% penalty.

My personal CPA is adamant that the 10% penalty would apply to a withdrawal of the backdoor conversion amount, but I don’t see why, or where that opinion is supported. Can you please help settle this debate? Thanks again for all you do.

Tyler

ANSWER:

With a backdoor Roth IRA conversion, a non-deductible contribution is made to a traditional IRA, and those dollars are subsequently converted. Yes, there is a 5-year clock before converted pre-tax dollars are available for withdrawal penalty-free for anyone under age 59½. However, after-tax dollars that are converted are never subject to the 10% penalty, regardless of when they are withdrawn. Be aware that there are distribution ordering rules within the converted dollars “tranche.” Pre-tax converted dollars come out first (the ones potentially subject to penalty), with converted after-tax dollars (no penalty) coming out next.

QUESTION:

Dear Slott Report,

I have a self-directed Roth IRA. I invested in a partnership that, during the Covid pandemic, went bankrupt. I lost all the money. Is there a way to distribute these losses to myself to add to my taxes? My CPA says no, but I wanted another opinion.

Thank you,

Joey

ANSWER:

Joey,

Sorry to hear about the investment loss. Your CPA is correct. Losses within a traditional or Roth IRA cannot be distributed or used to offset any gains or other tax liability.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/backdoor-roth-conversions-and-ira-losses-todays-slott-report-mailbag/

By Sarah Brenner, JD
Director of Retirement Education

Health Savings Accounts (HSAs) may be one of the biggest tax breaks currently available. If you have a qualifying high-deductible health plan, you may make a deductible contribution to an HSA. There are no income limits for eligibility to contribute. You can then take tax-free distributions from your HSA to pay for qualified medical expenses.

More Than Just Medical Bills

Qualified medical expenses mean more than just doctor bills. Qualified medical expenses include those that would generally qualify for the medical expense deduction under the Tax Code. This means you can take a tax-free distribution from your HSA to pay not only medical expenses like doctor and hospital bills, but also medical supplies, prescriptions co-payments, dental care, vision services, and chiropractic expenses. You can take tax-free distributions from your HSA to pay for your spouse’s or child’s medical expenses, even if they are not covered by your high-deductible health insurance plan.

Prior Year Expenses

You can take a tax and penalty-free distribution from your HSA in 2025 to pay for medical expenses in a previous year, as long as the expenses were incurred after you established your HSA. That means you do not have to make an HSA withdrawal every time you have a medical expense. You can pay that expense from your pocket, let your account grow, and decide to reimburse yourself in a later tax year. Even if you no longer have a high-deductible health plan and you are no longer contributing to your HSA, you can keep the HSA and continue to take tax-free distributions from your HSA to pay for your qualified medical expenses for you, your spouse, and your dependents.

At Age 65, and After Death

You cannot contribute to an HSA once you are enrolled in Medicare. However, you can keep your existing HSA, and you can still take tax-free distributions for qualified medical expenses. When you reach age 65, you also gain some new benefits with your HSA. Generally, insurance premiums are not considered qualified medical expenses. However, after age 65 and enrollment in Medicare, certain insurance premiums can be paid tax free with HSA distributions. You can take tax-free distributions from your HSA to pay for Medicare premiums, excluding Medigap.

If your HSA beneficiary is your spouse, after your death, he or she can maintain the HSA in his or her own name and can continue to access the funds. Distributions for qualified medical expenses will be tax free just as they would have been to you.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/taking-tax-free-distributions-from-your-hsa/

By Andy Ives, CFP®, AIF®|
IRA Analyst

There are two ways to move money from one IRA to another: a direct transfer or a 60-day rollover. With direct transfers, the funds are sent directly from one custodian to another. The IRA owner has no ability to use the dollars while they are in transit, and the transaction does not create any tax reporting. A direct transfer can be processed electronically, or a check can be sent. A check made payable to the receiving custodian “for the benefit of” (FBO) the IRA owner qualifies as a direct transfer. A direct transfer is the recommended way to move IRA dollars.

A 60-day rollover is a far riskier way to move IRA funds from one institution to another. The 60 days begin on the day the funds are received by the IRA owner. If they are not rolled over by the end of this 60-day window, it will be a taxable distribution. If the IRA owner is under age 59½, a 10% early withdrawal penalty will also apply (unless an exception exists). Additionally, even if the rollover is completed within 60 days, the transaction will generate tax forms that must be accounted for when the IRA owner files his tax return. A Form 1099-R will show the distribution, and a Form 5498 will show the corresponding rollover deposit.

The IRS has been agreeable to extend the deadline in certain situations. In fact, so many private letter ruling (PLR) requests were submitted over the years (pleading for an extension) that the IRS created a list of 12 items they will typically accept as reasons for missing the rollover deadline. The IRS went a step further and provided a means for IRA owners to self-certify that the reason they missed the deadline was due to one of these 12 reasons. With self-certification, an expensive PLR is not required. (Note that this self-certification process is not a get-out-of-jail free card. The IRS could still refuse the late rollover if it determines there was a larger violation of the rules.)

The 12 acceptable reasons for self-certification are:

• An error was committed by the financial institution making the distribution or receiving the contribution.
• The distribution was in the form of a check and the check was misplaced and never cashed.
• The distribution was deposited into and remained in an account that I mistakenly thought was a retirement plan or IRA.
• My principal residence was severely damaged.
• One of my family members died.
• I or one of my family members was seriously ill.
• I was incarcerated.
• Restrictions were imposed by a foreign country.
• A postal error occurred.
• The distribution was made on account of an IRS levy, and the proceeds of the levy have been returned to me.
• The party making the distribution delayed providing information that the receiving plan or IRA required to complete the rollover, despite my reasonable efforts to obtain the information.
• The distribution was made to a state unclaimed property fund.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/self-certification-after-60-days-12-reasons/

By Ian Berger, JD
IRA Analyst

Question:

Our client is 75 years old. He just retired on January 1, 2025. The company has recognized his retirement date as being January 1, 2025.

When must he take his first required minimum distribution (RMD)?

Rick

Answer:

Hi Rick,

If the client actually worked on January 1, 2025, then his first RMD year is 2025. The RMD for the first RMD year can be delayed until April 1 of the next year. So, he could delay the 2025 into 2026 – no later than April 1, 2026. But if he did that, he would have two RMDs payable in 2026, one for 2025 and the other for 2026.

It gets tricky if your client did not work on January 1, 2025 (and his last actual work day was in 2024). There is no IRS guidance on this situation. But the IRS could say that he actually retired (i.e., worked his last day) in 2024 even though the company is showing January 1, 2025, as his retirement date. If so, his first RMD was for 2024 and that RMD was due by April 1, 2025. If he has not taken the 2024 RMD, he would have to take it ASAP and file for a penalty waiver using Form 5329.

Question:

If I made a prior year Roth IRA contribution for 2024 in spring of 2025, when does the 5-year rule for holding that IRA begin?

Many thanks.

Phil

Answer:

Hi Phil,

The 5-year holding period for determining whether the distribution of earnings is taxable begins as of the first day of the year for which a contribution (or conversion) was made to any Roth IRA. The contribution you made in the spring of 2025 was for 2024. So, the 5-year period began on January 1, 2024.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/first-rmd-year-and-roth-ira-5-year-period-todays-slott-report-mailbag/

By Ian Berger, JD
IRA Analyst

Many retirement plans base employer contributions on employee compensation. For many years, Congress has limited the compensation that can be taken into account for those contributions. Fortunately, this dollar limit only applies to very highly paid employees.

The compensation limit increases most years based on inflation. For 2024, it was $345,000, and it went up to $350,000 for 2025. If you’re fortunate enough to be affected by the limit, it doesn’t mean you can’t receive an employer contribution. It just means that the contribution can only be made on your pay up to the dollar limit for the year.

One type of employer contribution often affected by the compensation limit is 401(k) matching contributions.

Example 1: Mark, age 52, is CEO of FB Company and earns $1.0 million dollars in 2025. The company’s 401(k) matches 50% of each employee’s elective deferrals, up to 6% of pay (a typical formula). For 2025, Mark defers the maximum $31,000 ($23,500 + $7,500 catch-up). The plan can only recognize $350,000 of Mark’s compensation in making the match. So, Mark’s matching compensation is limited to $10,500 [50% x (6% x $350,000)]. If all of his pay could be recognized, his match would be $30,000.

(Don’t feel too sorry for Mark. Many companies have non-qualified deferred compensation plans that allow higher paid employees to defer on their pay without being capped by the annual elective deferral limit.)

The compensation limit also comes into play when a 401(k) employer makes an across-the-board contribution (sometimes called a “profit sharing contribution”) to all employees, whether they defer or not.

Example 2: FB decides to make a flat 4% contribution to the 401(k) plan — instead of a match — for 2025. Mark’s contribution will be limited to $14,000 (4% x $350,000).

SEP IRAs are also subject to the compensation limit. The 2025 maximum SEP contribution is capped at 25% of up to $350,000 of pay, but in no event more than $70,000. SIMPLE IRAs may also be affected. A SIMPLE IRA sponsor can make either a matching contribution or an across-the-board contribution. Oddly, the compensation limit must be applied if an across-the-board contribution is made but not if a match is made.

Most defined benefit pension plans calculate benefits based on a formula that takes into account pay. For example, the plan might pay an annual benefit at retirement equal to 2% of average annual pay times years of service with the employer. In that case, pay cannot include amounts above the compensation limit for the year.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/how-the-compensation-limit-affects-retirement-plan-benefits/

By Sarah Brenner, JD
Director of Retirement Education

The IRS has introduced a new code for the reporting of qualified charitable distributions (QCDs) by IRA custodians on Form 1099-R.

How QCDs Work

QCDs first became available in 2006, and they were made permanent in 2015. The strategy has become increasingly popular among IRA owners who are charitably inclined. With a QCD, IRA owners or beneficiaries who are at least age 70½ make a tax-free donation to charity directly from their IRA. An important benefit of a QCD is that it can be used to satisfy a required minimum distribution (RMD).

The 2025 annual limit is $108,000, and it is indexed for inflation. A one-time QCD of $54,000 can go to a split-interest entity, such as a charitable remainder annuity trust, charitable remainder unitrust or a charitable gift annuity.

QCDs can only be made through a direct transfer of IRA funds to charities that qualify under the tax code. Gifts made to donor-advised funds or private foundations do not qualify. In addition, the client cannot receive anything of value from the charity in exchange for making a QCD, and that must be documented in writing.

New Code Y

Historically, IRA custodians have not been required to report a QCD differently than any other IRA distribution. There has never been any special code on Form 1099-R to identify the QCD. Instead, the QCD was coded like any other IRA distribution, and it was up to the taxpayer to let the IRS know about the QCD on the tax return.

For 2025 QCDs, the IRS appears to have changed its approach. In April 2025, the IRS released draft Instructions for the 2025 Form 1099-R. These draft Instructions introduced a new Code Y for QCDs. While these are only “draft” instructions, the IRS has also released the final version of the actual 2025 Form 1099-R with Code Y included.

Code Y would seem to be welcome news for both IRA owners and their tax preparers to help ensure that the QCD tax break is not missed. However, as before, IRA owners will need to be careful to make sure that their donation satisfies all of the QCD rules. Simply receiving a 1099-R with Code Y from the custodian does not necessarily guarantee that the donation qualifies for tax-free treatment.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/new-reporting-for-2025-qcds/

By Sarah Brenner, JD
Director of Retirement Education

Question:

Since I retired in 2020, each year I have been converting amounts from my employer plan to my Roth IRA. I will be age 73 in 2026. Can I take my required minimum distribution (RMD) amount and convert that to my Roth IRA?

Thanks,

Thomas

Answer:

Hi Thomas,

Unfortunately, this strategy will not work. You can continue to convert funds from your employer plan to a Roth IRA, but your RMDs cannot be converted. However, you can take the RMD and, once that is satisfied, continue to convert funds from the plan to your Roth IRA.

Question:

I retired from my job at age 53. I still have money in my former employer’s 401(k) plan. Now, I am age 57. I was told that since I separated from service and I am now over age 55 that I can take penalty-free distributions from my 401(k) plan. Can you please help clear this up for me?

Thank you for your help!

Gayle

Answer:

Hi Gayle,

Until you reach age 59½, any distribution that you take from the 401(k) plan would be subject to the 10% early withdrawal penalty unless an exception exists. There is an exception to the penalty for distributions taken when you separate from service in the year you reach age 55 or later. This exception would not work for you because even though you are over age 55 now, you separated from service when you were only age 53. It is the age at separation from service that matters and not the age at the time of the distribution.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/roth-conversions-and-401k-distributions-this-weeks-slott-report-mailbag/

By Andy Ives, CFP®, AIF®
IRA Analyst

Roth IRAs follow strict distribution ordering rules. Contributions come out first, then converted dollars, and then earnings. It does not matter how many Roth IRAs a person has, or if the accounts are held at multiple custodians. The IRS doesn’t care. All the IRS sees is one big Roth IRA bucket, and within that consolidated Roth IRA bucket, there are only three types of dollars: contributions, conversion, and earnings. Any distribution from any Roth IRA follows the ordering rules – contributions first, converted dollars second, earnings last.

Let’s focus on just the EARNINGS within this aggregated bucket of Roth IRA dollars. For the earnings to be tax free (which is the goal of starting a Roth IRA), a person must check two boxes. Box #1: He must own a Roth IRA – any Roth IRA – for 5 years. The 5-year clock starts on January 1 of the year of the first Roth IRA contribution or conversion. Box #2: He must be age 59½ or older (or disabled, purchasing a first home or deceased). Check both boxes, and you are living in a tax-free-earnings world for the rest of your life.

Assume a person is 60 years old, never had a Roth IRA before, and decides to make his first entry into a Roth IRA by doing a $100,000 conversion. When will his earnings be tax free? Answer: In five years. Until he reaches the 5-year mark, he only checks the age 59½ box.

What if this same person does another Roth conversion three years after the first conversion? When will the earnings on that SECOND Roth conversion be tax free? Answer: After only TWO years! Why? Because two years after that second conversion, he will be over age 59½ AND will have owned ANY Roth IRA for 5 years (based on his first conversion). With both boxes checked, the 5-year Roth IRA clock applicable to conversion #2 disappears. Any future Roth IRA contributions or conversions in this person’s life will result in IMMEDIATE tax-free earnings.

Example 1: Tom, age 60, never had a Roth IRA before. Excited by the opportunity to have tax-free earnings, he converts $100,000 from his traditional IRA. Since Tom never owned a Roth IRA, he must wait 5 years before the earnings are tax free. Three years later, when Tom is age 63, he does another Roth conversion. This second conversion has its own 5-year Roth IRA clock to wait out before the earnings are tax free. However, two years later, when Tom is age 65, he has checked both boxes: he is over age 59½ AND he owned a Roth IRA for 5 years. At that point, the 5-year Roth IRA clock applicable to Tom’s second conversion disappears, and ALL his Roth IRA earnings are tax-free. Tom will never have another Roth IRA 5-year clock to worry about. The earnings on any future Roth IRA contribution or conversion will be immediately available tax free.

Example 2: Betty was age 55 when she contributed to her first Roth IRA and started her 5-year clock for tax-free earnings. Three years later (age 58), Betty does a Roth conversion. This conversion has its own 5-year clock. However, two years after that, when Betty is age 60, she will have owned a Roth IRA for 5 years (based on her initial contribution at age 55) AND she will be over age 59½. Both boxes checked. Her conversion clock disappears. All earnings are tax free.

Check both boxes – age 59½ AND own any Roth IRA for 5 years – and all earnings in ALL your Roth IRAs are tax free.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/check-both-boxes-for-tax-free-roth-ira-earnings/

By Ian Berger, JD
IRA Analyst

The April 23, 2025, Slott Report article, “After-Tax 401(k) Contributions Shouldn’t Be an Afterthought,” discusses how 401(k) after-tax contributions can be moved into Roth accounts through in-plan Roth conversions, the “mega backdoor Roth IRA,” or split rollovers. This article will explain the tax implications of these strategies.

If you have made after-tax contributions to your plan, any earnings on those contributions are taxable when distributed to you. If you have earnings, you can’t just take out the after-tax contributions to avoid paying taxes on a withdrawal. Instead, a pro-rata rule treats part of your distribution as taxable.

Most 401(k)s have a separate account that contains only after-tax contributions (not taxable) and earnings (taxable). If your plan does separate accounting, then only that account is considered in doing the pro-rata calculation. (Neither pre-tax accounts nor Roth accounts within your 401(k) are considered for this calculation.) The portion of each withdrawal taxable to you is the ratio of earnings in the after-tax account to the value of the entire separate account. If you’re not sure whether your plan uses separate accounting, check with the plan administrator or your HR rep.

Example: Mei participates in a 401(k) plan that separately accounts for after-tax contributions and their earnings. She has $100,000 in contributions and $25,000 in earnings in that account. Mei wants to do an in-plan conversion to have $40,000 of that account transferred to her Roth account within the plan. Mei cannot just have all $40,000 come from non-taxable after-tax contributions. Instead, 20% ($25,000/$125,000) of the withdrawal, or $8,000, must come from taxable earnings. The remaining $32,000 comes from after-tax contributions and is tax-free.

By contrast, if Mei’s plan doesn’t have separate accounts, her pre-tax 401(k) accounts (e.g., elective deferrals and employer contributions) must be considered in calculating how much of the $40,000 conversion is taxable. That will require her to pay much higher taxes on the conversion.

The same tax analysis would apply if you are using the mega backdoor Roth IRA strategy to move after-tax contributions to a Roth IRA (instead of to your Roth 401(k) account through an in-plan conversion) while you’re working. Again, if your plan has separate accounting, only that after-tax account comes into play when calculating how much of the Roth IRA conversion is taxable.

You can avoid any immediate taxes on a Roth conversion by doing a split rollover of your after-tax and pre-tax 401(k) accounts. You would roll over your after-tax funds to a Roth IRA and your pre-tax funds (including earnings on after-tax contributions) to a traditional IRA. The after-tax funds would be converted tax-free to a Roth IRA, and any subsequent earnings could be withdrawn from the Roth IRA tax-free down the road. However, this split rollover is not available until age 59½ if you’re still working, and depending on the terms of your plan, may not be available until after you leave employment.

Since these rules are complicated, you should contact a knowledgeable financial advisor to discuss how to handle your after-tax plan contributions.

https://irahelp.com/slottreport/how-plan-after-tax-contributions-are-taxed-when-converted/

By Andy Ives, CFP®, AIF®
IRA Analyst

QUESTION:

My wife and I created a Roth IRA when our two children were young to pay for their college education. Our daughter is finishing her second year of school, and our son will be entering college this fall. We have withdrawn $30,000 so far from our contributions to pay her expenses. The current value of the Roth IRA is over $150,000. Our remaining contributions are around $70,000. I’ve been told that I can only withdraw our contributions without tax or penalty and cannot touch the earnings generated unless I pay the income tax. Is this true, or can we use the entire value for the qualified expense? My wife and I are 55 and 54 years old.

Thank you,

Chip

ANSWER:

Chip,

Roth IRAs follow strict distribution ordering rules. Contributions come out first, then converted dollars (none in your case), followed by earnings. Contributions are always available tax- and penalty-free, regardless of how old you are or how long the Roth IRA has been open. As such, you currently have access to $70,000 free-and-clear. The earnings are a different story. For Roth IRA earnings to be tax free, the Roth IRA must have been open for 5 years AND the Roth IRA owner must be at least age 59½, disabled, purchasing their first home or deceased. Unfortunately, paying for higher education is not a reason for taking tax-free distributions of Roth IRA earnings. Therefore, if you exhaust your contributions and start withdrawing the earnings, you can avoid the 10% under-age 59½ early withdrawal penalty by leveraging the higher education penalty exception. However, the earnings will be taxable.

QUESTION:

A recent Slott Report post states that if you are age 73 or older you will need to take your 2025 required minimum distribution (RMD) from your IRA prior to doing a Roth IRA conversion. However, if you turn age 73 in 2025, don’t you have the option to defer your first RMD to April 1, 2026? If so, then, can’t you do a conversion in 2025 without taking the RMD?

Thank you,

Les

ANSWER:

Les,

It is true that the RMD must be withdrawn before a Roth conversion can be completed. It is also true that the first RMD can be delayed until April 1 of the year after the year a person turns age 73. However, if the first RMD is delayed, it is still the first RMD that is applicable to the year the person turned age 73 (2025 in your case). Since it is the RMD for 2025, delaying it to 2026 does not change the fact that it must be withdrawn before doing a conversion in 2025.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/roth-iras-and-required-minimum-distributions-todays-slott-report-mailbag/

By Sarah Brenner, JD
Director of Retirement Education

While most distributions from a traditional IRA are taxable, sometimes distributions can include after-tax dollars. These after-tax dollars are known as “basis.” Handling and tracking basis in your traditional IRAs can be challenging, but it is important to get it right. If mistakes are made, double taxation can occur. That is a result no IRA owner wants.

What Is Basis in a Traditional IRA?

Basis in a traditional IRA consists of after-tax dollar contributions. Basis in your IRA can come from two sources:

• Nondeductible tax-year IRA contributions (including those that are done as part of the backdoor Roth IRA conversion strategy).
• After-tax funds that are rolled over from a plan like a 401(k). (This does not include funds from a Roth plan account, which cannot be rolled over to a traditional IRA.)

Earnings on basis amounts are tax deferred, not tax free. When earnings are distributed, they are taxable as ordinary income. While basis avoids the 10% early distribution penalty, earnings on these after-tax dollars can be subject to the 10% early distribution penalty, if applicable.

Basis carries over to inherited IRAs. Most beneficiaries, and even their tax preparers, aren’t aware of this issue. If you inherit an IRA, you need to determine whether basis exists. Failure to adequately investigate will cause you to overpay taxes on distributions from the inherited IRA.

IRAs Are Different When It Comes to Basis

Basis in your IRA is different from basis in your investment account. In an investment account, basis is the amount paid for the asset. Growth on that investment is taxed as long-term or short-term capital gain. At the death of the owner, a beneficiary gets a step-up in basis to the current market value. There is never a step-up in basis in any retirement account.

Form 8606

Someone, somewhere, has to be tracking the basis in IRA accounts. Did you think it was the IRA or custodian? You would be wrong. The “I” in IRA stands for “individual.” The individual is responsible for tracking their own basis.

You can track your basis using Form 8606. This form is filed with your tax return each year that you make an after-tax contribution to your traditional IRA, and each year that you take a distribution from your IRA (if the IRA contains basis).

Filing Form 8606 to track your basis is important. No one wants to pay taxes on funds that have already been taxed!

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/basis-in-your-traditional-ira/

By Andy Ives, CFP®, AIF®
IRA Analyst

When a person under the age of 59½ needs access to his IRA dollars, there is a 10% early withdrawal penalty applied to any distribution, unless an exception applies. One of the many 10% penalty exceptions is a 72(t) “series of substantially equal periodic payments.” Due to the possibility of errors over the required duration of such distribution schedules, it is our opinion that establishing a 72(t) should be the last resort. However, sometimes life gets in the way and a person has no other options.

A 72(t) payment plan must continue for five years or until age 59½, whichever comes later. A person leveraging a 72(t) cannot simply choose whatever amount he wants to take. A calculation must be made to determine the allowable distribution amount. The calculation factors in items like the balance in the account, the person’s age and a particular interest rate. Three distribution “methods” have been approved by the IRS: required minimum distribution (RMD), amortization, and annuitization. Usually, the same distribution method must be maintained during the entire payment period. The goal is to use the method that produces the largest 72(t) payments with the smallest IRA balance. This typically results in selecting either the amortization or annuitization method, because the RMD method usually produces a smaller payment.

But what if a market downturn caused the balance of the IRA to severely decline, resulting in the annual 72(t) payments becoming a much larger percentage of the IRA balance? There is relief. IRS Revenue Ruling 2002-62 permits a one-time switch from either the amortization or annuitization methods to the RMD method. This may be appropriate in 72(t) situations where the IRAs has shrunk due to a stock market downturn.

Note that if the switch is made to the RMD method, it is permanent until the end of the original 72(t) payment period. Any other changes would be considered a modification and result in retroactive penalties. Also, be aware that, while 72(t) payments cannot be converted to a Roth IRA, the entire IRA from which the 72(t) payments are coming CAN be converted to a Roth IRA. If the IRA has lost substantial value, converting the account during a market downturn could be a wise tax planning decision. Just be sure to continue with the same payment schedule.

Example: David, age 58, has been consistently taking 72(t) withdrawals from his IRA for three years under the amortization method. With a recent market downturn, his investments have lost considerable value. His required 72(t) payments are now eating up a much higher percentage of his account. To reduce the draw on his IRA, David elects to switch to the RMD method to calculate the remainder of his 72(t) payments. David must still adhere to the original 5-year payment period and can make no other modifications during that time.

For anyone considering a 72(t) series of substantially equal periodic payments, please be hyper careful. The same holds true for anyone with an existing 72(t) looking to make the one-time switch outlined above. One false step and years of retroactive 10% penalties could come due.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/72t-switching-methods-in-a-market-downturn/

By Ian Berger, JD
IRA Analyst

Question:

At age 71, I’m not yet subject to required minimum distributions (RMDs) from my IRA or workplace retirement accounts.  However, I am required to take annual RMDs from a pre-2020 inherited IRA and a pre-2020 inherited Roth IRA.

Am I required to take the RMDs from these inherited accounts prior to doing a Roth conversion from my own IRA?  Does that change in the year in which I turn age 73?

Answer:

No. You are not required to take RMDs from your inherited accounts before doing a Roth conversion from your own IRA. That will not change starting in the year you turn age 73. But before doing a Roth conversion in that year (or in a subsequent year), you will need to first take the RMD from your own IRA.

Question:

I am 69 years old and plan to retire soon. I have an old Keogh Profit-Sharing Plan that I want to start converting into a Roth IRA.

I’m getting conflicting answers on how this can be done properly. One IRA custodian tells me that I must convert it first into a traditional IRA and then convert it into a Roth. Another IRA custodian tells me that I can convert it directly into a Roth. Both options require me to pay full income taxes on the amount being transferred.

Can you give me some guidance on what you think is the right way to do this?

Thanks,

Mike

Answer:

The first custodian gave you bad advice. For many years, the tax law has allowed direct conversions of retirement plan distributions to a Roth IRA. So, there is no need to first roll over your Keogh plan funds to a traditional IRA before doing the conversion.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/rmd-calculation-and-direct-roth-conversions-todays-slott-report-mailbag/

By Sarah Brenner, JD
Director of Retirement Education

With the popularity of Roth 401(k) contributions, after-tax (non-Roth) employee contributions have gotten short shrift. But, if your plan offers them, after-tax contributions are worth considering. They can significantly boost your retirement savings and can sometimes be funneled into Roth accounts while you’re still working.

After-tax contributions are contributions you make from already-taxed salary. Unlike earnings on Roth 401(k) contributions, earnings on after-tax contributions are always taxable. 401(k) and 403(b) plans are allowed to offer after-tax contributions, but many do not.

One reason your plan may not offer after-tax contributions is because of IRS nondiscrimination rules. Those rules limit the amount of after-tax contributions that a high-paid employee can make, based on the amount that low-paid employees make. Since high-paid employees are the ones most likely interested in making after-tax contributions, the nondiscrimination test is often difficult to pass.

However, after-tax contributions always work for solo 401(k) plans because those plans aren’t subject to nondiscrimination rules.

If your plan offers after-tax contributions, you can potentially put away large amounts. You are limited in the amount of elective deferrals (pre-tax and Roth) you can make in any calendar year (for 2025, $23,500; $31,000 if age 50 or older; and $34,750 if ages 60-63). Importantly, after-tax contributions do not count against this limit. Those contributions, along with elective deferrals and employer contributions (such as matches), do count against another annual dollar limit. But that dollar limit is much higher – for 2025, $70,000, and even more if you’re older. So, even if you’ve maxed out on pre-tax and Roth contributions and have received an employer contribution, you’ll likely still have enough room to make substantial after-tax contributions.

As mentioned earlier, the downside to after-tax non-Roth contributions is that earnings are always taxable. However, your plan may allow you to move your after-tax funds into a Roth account before you accumulate considerable earnings. This can be done through either an in-plan Roth conversion or the “mega backdoor” Roth option.

An in-plan Roth conversion allows you to convert your after-tax dollars (and any other non-Roth dollars) into the 401(k) plan’s Roth account. You’ll pay taxes on the earnings in the year of the conversion, but the Roth account can later be withdrawn tax-free or rolled over to a Roth IRA. The mega backdoor Roth strategy allows you to move after-tax 401(k) funds directly from the plan into a Roth IRA. Once again, you’ll pay taxes on any earnings, but withdrawals from the Roth IRA down the road can be tax-free.

If you still have after-tax contributions in the 401(k) when you leave employment, you can do a split tax-free rollover. This allows you to roll over the after-tax contributions themselves (and any Roth 401(k) funds) to a Roth IRA, while rolling over pre-tax dollars, including earnings on after-tax dollars, to a traditional IRA.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/after-tax-401k-contributions-shouldnt-be-an-afterthought/

By Sarah Brenner, JD
Director of Retirement Education

The April 15 tax-filing deadline has come and gone. However, for some 2024 retirement account planning strategies, it’s not too late! There is still time beyond the April 15 deadline. Here are three retirement account moves for the 2024 tax year that are still available to make in 2025.

1. Correct a 2024 IRA Contribution

For IRA owners who are now discovering they have an excess IRA contribution for a 2024 IRA, there is still time to correct the contribution and avoid a 6% excess contribution penalty. This can be done by withdrawing or recharacterizing the 2024 contribution, plus net income (or loss) attributable, by October 15, 2025.

October 15 is also the deadline to remove or recharacterize 2024 IRA contributions that are not actually excess contributions but are, instead, simply unwanted. After October 15, 2025, this flexibility for 2024 IRA contributions goes away.

The October 15, 2025, deadline for correcting 2024 contributions applies to anyone who timely files their 2024 tax return. This is true even if you do not have an extension past the standard April 15 deadline.

2. Make a 2024 SEP Contribution

There is also additional time for those looking to establish and contribute to a SEP IRA plan for 2024. While contributions to a traditional or Roth IRA must be made by the tax-filing deadline, a SEP IRA plan can be established and funded at any time up to the business’s tax-filing deadline, including extensions.

The SEP limit for 2024 is 25% of up to $345,000 of compensation, limited to a maximum annual contribution of $69,000. (For 2025, these numbers increase to $350,000 of compensation, limited to a maximum contribution of $70,000.)

3. Make a 2024 Employer Contribution to a Plan

If a business has employees, any employee contributions to a retirement plan for 2024 must have already been made. Employee salary deferrals have strict deadlines that require deferrals to be deposited into the plan throughout the year soon after the contribution is withheld.

However, employer contributions for 2024 to retirement accounts have a later deadline. Employer contributions can still be made until the business’s tax-filing deadline, including extensions. This rule applies to employer contributions to both qualified plans, such as 401(k) plans, and SIMPLE IRA plans.

https://irahelp.com/slottreport/3-retirement-account-moves-you-can-still-do-for-2024/

By Andy Ives, CFP®, AIF®
IRA Analyst

Question:

Are rollovers done by a spouse beneficiary subject to the once-per-year IRA rollover rule? The IRA funds were never distributed to me. They were directly transferred from my deceased husband’s IRA to my own IRA. Everything was done electronically at the same firm. I’m being told that the second transfer is taxable.

Camilla

Answer:

Hi Camilla,

The once-per-year rollover rule applies to 60-day rollovers between IRAs. It does apply to spouse beneficiaries; however, it is not a concern in your situation. You did not do any 60-day rollovers. Instead, you moved the funds from the inherited IRA to your own IRA by doing direct transfers. Direct transfers are not subject to the once-per-year rollover rule, so you do not have a problem.

Question:

I have a traditional IRA and four SEP IRAs. Can I calculate my total 2025 RMD and take that total out of one SEP IRA?

Dave

Answer:

Hi Dave,

Good news! Aggregation of required minimum distributions (RMDs) is permitted between traditional and SEP IRAs. You can take the total of all your 2025 RMDs from the traditional IRA or from any combination of the SEP IRAs.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/once-per-year-rollover-rule-and-rmd-aggregation-todays-slott-report-mailbag/

By Andy Ives, CFP®, AIF®
IRA Analyst

The recent market ride has been nuts. It is certainly no fun for anyone who owns stock or stock funds. Many of us are experiencing the same sensation in our gut as when a roller coaster click, click, clicks to its apex and then plummets over the edge. (That’s why I don’t ride roller coasters anymore.) Wild swings in the market result in sleepless nights for many. But for those with a long-term view, there is a potential silver lining in this storm cloud.

Market dips can create positive opportunities with the net unrealized appreciation (NUA) tax strategy…but can also lead stock owners down the wrong path. When executed properly, the NUA strategy allows a person to pay ordinary income tax on the cost basis of company stock from his workplace retirement plan, and long-term capital gains on the appreciation. This could result in tens of thousands of dollars in tax savings. Forward-looking employees could view a dip in the price of the company stock in their 401(k) as an opportunity to “reset their basis.”

Example: Kyle, age 45, participates in the 401(k) offered by his employer, ABC Company. Within his 401(k) account, Kyle owns shares of ABC stock and has a current average cost basis of $40. When the market was at its peak, ABC stock reached $70 per share. However, with the recent downturn, ABC stock has slumped to $30 per share. Kyle sells all his ABC stock within his 401(k) and promptly buys back the shares at $30, thereby “resetting” his cost basis. (The “wash-sale rule” does not apply in this scenario.) If ABC stock rebounds over the next few years, Kyle has set himself up for a more favorable NUA distribution in the future.

Unfortunately, market volatility can also lead to panicked decisions. Others within ABC Company (from the example above) may not have been so level-headed as Kyle. The adage of “buy low, sell high” often gets reversed. A mistake would be to liquidate all 401(k) company stock shares while the markets are tumbling and to sit on the sidelines until conditions improve. But timing the market is impossible. Missing the rebound “bumps” on the way back up could significantly minimize returns (e.g., the Dow Jones spiked 2,963 points on April 9).

Additionally, selling out and buying back company stock at a higher share price could ruin what was previously a solid NUA opportunity.

Example: Nervous Nellie also works at ABC Company and has company stock in her 401(k). Nervous Nellie is a long-time employee with a cost basis of $20 per share. When the ABC stock price dipped to $30, Nellie could not take the volatility anymore. She dumped all her shares and stayed away until the news was more rosy. Ultimately, when ABC stock rebounded and settled in at $60 per share, Nervous Nellie reallocated her 401(k) and bought back into ABC. In her panic, Nervous Nellie reset her cost basis HIGHER, from $20 per share to $60. If an NUA transaction is in her future, Nellie’s actions will prove detrimental.

Before haphazardly panic-selling company stock, be sure to consult with a knowledgeable financial professional to assess your situation. Resetting NUA basis can go both ways.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/nua-resetting-cost-basis/

By Ian Berger, JD
IRA Analyst

In the 2022 SECURE 2.0 legislation, Congress gave the IRS two years – until December 29, 2024 – to come up with rules allowing IRA owners to fix certain mistakes through self-correction. Alas, December 29, 2024 has now come and gone, and we’re still waiting for those rules.

Here’s the background: For a number of years, the IRS has had a program in place – the Employee Plans Compliance Resolution System (EPCRS) – that allows employers to correct errors made by their retirement plans. SECURE 2.0 legislation loosened EPCRS to make self-correction for plans even more widely available.

Importantly for IRAs, SECURE 2.0 also expanded EPCRS to permit self-correction of IRA mistakes. Self-correction allows correcting those errors without paying any penalty or even notifying the IRS, as long as correction is made in accordance with IRS rules.

This was exciting news! It is true that IRA owners already have the ability to fix certain IRA mistakes. For example, since 2016, the IRS has permitted “self-certification” to remedy rollovers made after the 60-day deadline in certain circumstances. In addition, the 25% penalty for missed required minimum distributions (RMDs) can be avoided if the IRA owner properly requests a waiver of the penalty.Finally, an excess IRA contribution can be corrected without penaltyif the contribution, plus attributable earnings or losses, is returned by October 15 of the following year.

But there are several other commonplace errors that currently cannot be corrected and would be prime candidates for EPCRS correction. These include the once-per-year rollover rule, nonspouse beneficiary 60-day rollovers, and modifications of 72(t) payment schedules.

In fact, in SECURE 2.0, Congress said that any “eligible inadvertent failure” related to an IRA (except for “egregious” errors) could be self-corrected. Congress even listed two specific examples of “eligible inadvertent failures” for which the IRS should allow self-correction. The first would allow a waiver of the 25% penalty on missed RMDs. As discussed above, the IRS already freely excuses this penalty if a waiver request is made, so it’s not clear how self-correction would fit in with that existing policy. The second would allow a nonspouse IRA beneficiary to return an inherited IRA that had been rolled over when, because of an “inadvertent error” by a service provider, the beneficiary believed a tax-free 60-day rollover was possible. Again, though, it’s not clear how far this relief will go.

All we can do is take comfort in the words of the late, great, Tom Petty: “The waiting is the hardest part.”

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/still-waiting-for-irs-guidance-on-ira-self-correction-program/

By Andy Ives, CFP®, AIF®
IRA Analyst

QUESTION:

A 401(k) plan participant over age 73 wants to roll over his account to a new IRA. I understand that he must take a required minimum distribution (RMD) before the rollover. Is an additional RMD required in the same year from the IRA?

ANSWER:

If this person has no other IRAs besides the new one receiving the 401(k) funds, then no additional RMD needs to be taken from the IRA for this year. Reason being is that the IRA receiving the 401(k) rollover funds had a $0 balance on December 31, 2024. With no balance for the previous year’s end, there is no 2025 RMD on the IRA to calculate.

QUESTION:

I am turning age 73 this year and will need to take my RMD. I have three different investment firms for my IRAs, SEP IRA plan and a 457(b) plan. My question is: Do I have to take my required minimum distribution (RMD) from each plan/firm or can I take the full amount from any one of the accounts?

Thank you,

Dean

ANSWER:

Dean,

Your question is all about the RMD aggregation rules. Some accounts can be aggregated for RMD purposes, and some cannot. In your specific scenario, the IRAs and SEP IRA account RMDs can be aggregated. While the RMD must be calculated individually for each IRA and the SEP account, all or any portion of the aggregated total can be taken from any combination of the IRAs and SEP. The 457(b) RMD, on the other hand, cannot be aggregated with any other account. That RMD must be taken from the 457(b) plan.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/rollovers-and-required-minimum-distributions-todays-slott-report-mailbag/

By Sarah Brenner, JD
Director of Retirement Education

Recent turmoil in the markets has hit many retirement savers hard as they see their IRA and 401(k) balances rapidly shrinking. For many, the age-old advice to stay the course for the long term and not cash out too soon applies, but for those who are age 73 or older, the rules requiring required minimum distributions (RMDs) present a hurdle.

2025 RMDs

Under current tax rules, IRA owners and many participants in employer plans must start taking RMDs once they reach the year in which they turn age 73. (The first RMD can be delayed until the following April 1, but then you would have two RMDs due in the next year.) Some plan participants can also delay RMDs if they are still working.

To calculate your 2025 RMD, you divide the December 31, 2024, balance of your account by the factor that corresponds with your age on the IRS Uniform Lifetime Table. Here is the issue: Due to recent market losses, many have seen their account balances decrease sharply from where they were at the end of 2024. This means taking an RMD calculated on a much bigger balance from a significantly smaller account.

RMD Waivers

Will retirement savings get any relief from this 2025 RMD hit?

In the past, when the markets have experienced very severe declines, Congress has stepped in and waived RMDs for the year. We saw this happen in 2009 during the Great Recession and then again in 2020 due to the global pandemic. As of right now, it is too early to tell if similar relief will be available in 2025, but the fact that this happened before is worth noting.

In these times of market volatility, retirement savers may want to delay 2025 RMDs until later in the year. Retirement account balances may have recovered by then, or Congress may act and grant some relief, as they have done before.

Stay Tuned

At the Slott Report, we have heard from many IRA owners and plan participants who are concerned about their 2025 RMDs in these times of market losses. We will be following any developments on this issue closely. Stay tuned for updates!

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/will-market-volatility-mean-rmd-waivers-for-2025/

By Andy Ives, CFP®, AIF®
IRA Analyst

As a follow up to the March 26 Slott Report entry that included a full list of the 10% early withdrawal penalty exceptions (“10% Penalty Exceptions: IRAs and Plans”), here we get a little deeper into the weeds on some of the nuances of certain exceptions. As mentioned in the March 26 article, some exceptions apply to plans only, some to IRAs only, and some to both. Taking that concept a bit further, some exceptions apply to the account owner only, and some to certain extended family members of the account owner.

Not only must a person know which exceptions apply to which accounts, but they must also recognize who can leverage these exceptions. We have seen countless situations where a misunderstanding has led to the exception being denied. For example, in a recent court case, an IRA owner under the age of 59½ took a distribution from his account and claimed the disability exception. He used the dollars to cover expenses for his disabled wife. And therein lies the problem. The disability exception is applicable to the IRA owner only. Even though the distributed money was used to cover the legitimate costs for taking care of a disabled person (the wife), the IRA owner (husband) was not disabled. To qualify for the exception, the withdrawal needed to come from the disabled wife’s account. The 10% penalty exception was denied.

Like the disability exception, other exceptions available to the account owner ONLY include birth or adoption, terminal illness, active reservists, age 55, and the 72(t) substantially equal periodic payment exception. Meaning, the account owner himself must be the one who is terminally ill or adopting a child. Other exceptions are applicable to the account owner AND certain extended family members. These include the following:

• Higher Education (IRAs only). The 10% penalty on the IRA distribution can be avoided if the higher education costs are for the IRA account owner, his spouse, child, or grandchild of either the owner or spouse. Nephews, cousins and siblings of the IRA owner do not qualify.

• First-Time Homebuyer (IRAs only). For the purchase of a home belonging to the IRA owner, his spouse, any child, grandchild, or ancestor of the IRA owner or his spouse. Again, people like nephews, cousins and siblings of the IRA owner do not qualify.

• Medical Expenses over 7.5% of adjusted gross income (Plans and IRAs). This exception is used for expenses incurred by the account owner, spouse or dependent. Just be careful with timing. The medical expenses must be paid in the same year as the distribution.

• Domestic Abuse (Plans and IRAs). The IRA owner himself does not need to be the victim to qualify for this exception. The abuse could be inflicted on the account owner’s child or another family member living in the household.

• Financial Emergencies (Plans and IRAs). This exception is for distributions necessary to meet “unforeseeable or immediate financial needs relating to personal or family emergencies.” Hence, it is available for a family member’s emergency, not just those of the account owner.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/who-can-use-a-10-penalty-exception/

Question:

My wife turns 73 years old in August 2025. My understanding is that she has until April 1, 2026, to take her first required minimum distribution (RMD), in which case she would wind up taking two RMDs in 2026.

The RMD for 2025 is approximately $24,000. My question is: Can she can take a partial RMD of, say, $20,000 in 2025 and the $4,000 balance in 2026? Or, if she takes anything out of the IRA in 2025, does it have to be the full amount?

Thank you.

Les

Answer:

Hi Les,

Your wife can split the 2025 RMD between 2025 and 2026, as long as the total RMD is taken by April 1, 2026.

Question:

I am turning age 73 in 2025. I am still working, so I know I don’t need to start taking RMDs on my 401(k) because my plan has the still-working provision. All of my IRAs have been converted to Roth IRAs. I do a backdoor Roth each year on January 1. My question is: Do I need to take an RMD on the $8,000 contribution before I convert it to a Roth IRA?

Clinton

Answer:

Hi Clinton,

No, an RMD does not need to be taken. The reason is that lifetime RMDs are only required for traditional IRAs – not Roth IRAs. So, the RMD is based on the prior-year 12/31 account balance of your traditional IRAs divided by your life expectancy under the IRS Uniform Lifetime Table. If all of your traditional IRAs have been converted, then, for RMD purposes, you will have a zero account balance as of 12/31 of the prior year.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/slottreport/deferral-of-first-rmd-and-rmds-for-roth-iras-todays-slott-report-mailbag/