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The rules that govern IRAs, 401(k)s and other retirement accounts are complex. Need a plain-English explanation? Ask us!
IRA
401K
Social Security
Beneficiary Planning
IRA
Frequently Asked Questions Regarding
IRAs
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Should I owe the 6 percent excise tax for an excess IRA Contribution PenaltyI am 64 years old and I am on social security. I have no other income for last year or this year. In January of this year, I made an IRA carry-back contribution ( for last year) contribution to my traditional IRA. When preparing my tax return this March , the results show that I will be penalized 6% excise tax on the contribution. Why is that?Answer: The 6% excise tax applies when an excess contribution is made to an IRA, and it is not properly corrected by the IRA owner’s tax filing due date, plus extensions.
For example: If you make an excess contribution to your IRA for 2020 and you do not correct it by you 2020 tax filing due date, including extensions, you will owe the IRS a 6% excise tax for 2020, and for every subsequent year the amount remains in your IRA as an excess contribution.
Therefore, your tax preparation software should not be showing an 6% excise tax for your excess contribution if your indicate that the excess has been or will be properly corrected by your tax filing due date, plus extensions.
Why You Have an Excess Contribution
You must have eligible compensation to be eligible to make a regular contribution to an IRA. Eligible compensation includes wages and self-employment income. Because your only income is social security, you are not eligible to make a regular contribution to an IRA (For purposes of making a contribution to an IRA, social security income is not considered eligible compensation).
Therefore, your entire IRA contribution is an excess contribution.
Since you are still within the deadline for correcting your 2020 IRA excess contribution, you will not owe the 6% excise tax as long as you distribute the excess, along with any net income attributable, by your tax filing due date, including extensions. If you miss this deadline, you will owe the IRS a penalty for 6% of the excess contributions, for every year the excess remains in your IRA.
How to Correct the Excess Contribution
The question now becomes, since you do have an excess contribution, what should be done to have it corrected so as to avoid the 6% excise tax?
The solution: You should remove the amount from your IRA as a ‘return of excess contribution.’ You have until your tax filing deadline, including extensions, to remove the amount as a return of excess contribution. Since you already filed your tax return (which means you filed it by the deadline), you receive an automatic 6-month extension to correct the error (under the return of excess method). This automatic 6-month extension means that you have until October 15 to correct the error.
The 6% excise tax applies only if you fail to remove the excess amount by the deadline.
• Contact your IRA custodian and instruct them to remove the IRA contribution as a return-of-excess contribution. They may have a special form for this purpose.
• Ensure that any net income attributable (NIA) to the excess is removed along with the contribution. NIA can be earnings or losses.
• Amend your tax return to remove the 6% penalty.
Your IRA custodian will send you a Form 1099-R for the correction by January 31 of next year. If there are any earnings removed with the excess, you will need to include them on your tax return filed for this year.
Please be sure to consult with your tax advisor. -
How do I fix an excess contribution to a Roth IRA, if I made too much money to make the contribution?Question: I made a regular contribution to my Roth IRA and found out afterwards that I am ineligible to make the contribution because my modified adjusted gross income (MAGI) is too high. How can I fix this?Answer: If an individual makes a regular Roth IRA contribution and is ineligible to make that contribution, that contribution would be an excess contribution. An individual has two options for an excess Roth IRA contribution.
- Recharacterize the contribution to a traditional IRA. This must be done by the individual’s tax filing due date, including extensions and must be accompanied by any net income attributable (NIA). This option will result in the amount being a traditional IRA contribution. The individual must have eligible compensation of at least the IRA contribution amount, subject to statutory limits, in order to be eligible for this option.
- Distribute the amount as a return of excess contribution. For this option the following applies:
- If this is done by the individual’s tax filing due date, including extensions, it must be accompanied by any net income attributable (NIA). The result would be the same as if the contribution was never made to the Roth IRA
- If this is done after the individual’s tax filing due date, including extensions, it is not accompanied by the NIA, and a 6% excise tax applies for every year it remains in the Roth IRA.
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Can I convert my RMD to my Roth IRA?I am due to take a required minimum distribution (RMD) from my traditional IRA this year. However, I would like to convert a portion of my traditional IRA to my Roth IRA. Am I able to convert my RMD amount to my Roth IRA?No. You cannot convert your RMD to your Roth IRA.
Also, you must take your RMD before you convert any amount to your Roth IRA. This applies for two reasons:
- For any year that you are required to take an RMD from your traditional IRA, the first distributions that you take from your traditional IRA always include your RMD until your RMD is satisfied.
- RMDs are not eligible to be rolled over. And, by definition, a Roth conversion from a traditional IRA is a two-step process that includes :
Step 1: A distribution from the traditional IRA and
Step 2: A rollover contribution to the Roth IRA (reported/treated as a Roth conversion). This Step 2 cannot include your RMD.
Example 1:
- Assume that your RMD for your traditional IRA for this year is $10,000.
- Assume, too, that you took a distribution of $25,000 from your traditional IRA, and this is the first distribution that you took for the year. The following applies:
- You must keep $10,000 (in pocket) as your RMD
- The remaining $15,000 can be rolled over to an eligible retirement account, including rolled over to a Roth IRA as a conversion. This must generally be done within 60-days of receipt.
Example 2:
Assume that your RMD for your traditional IRA for this year is $5,000, and you want to convert $10,000 to your Roth IRA from your traditional IRA.
You must take a distribution of $5,000 to yourself first. Then you can convert $10,000 from your traditional IRA to your Roth IRA. -
Why was Form 5498 Not Issued for my Rollover Contribution?I took a distribution from my IRA last year, but I subsequently rolled over the amount to my IRA within 60-days, which means that the amount is not taxable. However, I did not receive a Form 5498 IRA Contribution Statement for last year, and I am concerned that this absence of the Form may lead the IRS to determine that my distribution is taxable. When I contacted my IRA Custodian, they told me that Form 5498 will be issued for this year, in May of next year. Is that correct?It depends. While your IRA Custodian is required to issue a Form 5498 for rollover contributions made to your IRA, you will not receive one for last year if your rollover contribution was made this year. This can be the case for distributions that are taken late in the year and rolled over the following year. For example, if a distribution taken in December of 2021 and the amount is rolled over in January of 2022, the 5498 would be issued in May of 2023. If that is the case, provide a copy of your IRA statement, showing the rollover, to your tax preparer. Your tax-preparer should be able to use the information on the statement to prepare your tax return.
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Who is responsible for tracking after-tax amounts in IRAs?My client has had some after-tax amounts in her traditional IRA from nondeductible contributions. However, when her IRA custodian reported her distribution, they reported the entire amount as taxable. I know that is not the case, but they refuse to make any corrections. How can she get them to fix this?IRA custodians are required to report regular distributions from traditional IRAs as fully taxable. Therefore, the IRA custodian is not required to make any corrections. However, her tax-preparer is required to file IRS Form 8606, Nondeductible IRAs to report the after-tax portion of her distribution. IRS Form 8606, Nondeductible IRAs includes a built-in formula that will help the tax-preparer calculate the nontaxable portion, and communicate the information to the IRS.
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Advance IRA contributionI received an unexpected bonus and I would like to put a portion of it in my IRA so as to help remove the temptation from spending it. However, I already contributed the maximum amount allowed for this year to my IRA. Can I make an IRA contribution for next year now?No. A regular IRA contribution for a year must be made Between January 1 of the year, up to April 15 of the following year. Contributions before that period are not permitted.
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Active Participant status for deducting IRA contributionsI worked for only one month last year and then retired. I made a contribution to my traditional IRA for last year. However, I understand that I might not be eligible to claim a deduction for the contribution that I made to my IRA because I received contributions under my employer’s retirement plan. Is that correct?It depends.
If you are not an active participant or married to an active participant, the contribution is fully deductible.
If you are an active participant, and/or married to an active participant, the deductibility of the contribution would be determined by your modified adjusted gross income (MAGI) amount and tax filing status.
Despite the fact that you worked for only one month, you can still be considered an active participant if you received contributions and/or benefits under the plan. However, the determination of your ‘active participant ‘status depends on the type of retirement plan, your eligibly for participating in the plan and/or if contributions are made to the plan for the year. -
Converting Inherited IRAI recently inherited a Traditional IRA and would like to convert a portion of it to a Roth IRA. Am I allowed to do so?
It depends. If you are not the surviving spouse of the IRA owner, you are not eligible to convert the amount to a Roth IRA.
If you are the surviving spouse of the IRA owner, you can convert the amount to your own Roth IRA providing you elect to treat the Traditional IRA as you own before the conversion. One of the methods of treating the IRA as your own is by transferring the amount to your own (non-inherited) Traditional IRA. This option to treat the IRA as your own is available only to a surviving spouse beneficiary. Caution: If the decedent was required to take an RMD for the year of death, that amount cannot be included in the conversion, and must be withdrawn before the conversion.
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Is it easier to keep Nondeductible IRA contributions separately?In your QandA | Separate IRA for Nondeductible IRA Contributions, you explained that it is not necessary to establish separate IRAs for “nondeductible IRA contributions”. I have the following follow-up question:“While it is not necessary to maintain a separate IRA for nondeductible contributions, would it be easier to keep those contributions in a separate IRA for tracking purposes?”
In my opinion- no. However, it comes down to the IRA owner’s preference! The following are some factors that should be considered by someone who is considering such an option:
- You would still be required to file Form 8606. You could be subject to IRS assessed penalties if you fail to file IRS Form 8606.
- Generally, keeping these contributions separate provide no benefits to you- as an IRA owner-that are not already available with the filing of Form 8606. Consider this- if you keep those nondeductible contributions in a separate IRA and you want to determine your total nondeductible IRA contributions, you could:
- Check your Forms 5498 and tax return for every year the IRA is opened, to determine the amount of nondeductible contributions, and tally the amounts. This would ensure that losses/earnings are not included in your total.
- Or, you could simply check your most recent Form 8606- assuming that you do file one for every year it is required to be filed. You would still need to check your Form 8606 anyway- as it is the official document for identifying your nondeductible contributions.
- Your IRA Custodian is not responsible for keeping track of your nondeductible IRA contributions. You would be responsible for keeping track of which of your IRAs hold those nondeductible contributions. Form 8606 serves this purpose
- Keeping these contributions in separate IRAs could mean paying fees for multiple IRAs. This includes maintenance fees, administrative fees, and ticket charges for trades -for instance, if you want to buy 100 shares of a stock, and split that trade between the two IRAs.
- Keeping these contributions separate IRAs may mean more statements to retain/manage
- Unless there is some identifying marker/record on the account ( or your account records) that interested parties (you, your beneficiaries, your tax/estate planning professional) can use to identify the IRA as one that holds nondeductible contributions, keeping the contributions separate might not be helpful. Generally, IRA custodians/Trustees do not add such identifying markers/labels.
Response by Denise Appleby CISP, CRC, CRPS, CRSP, APA
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Separate IRA for Nondeductible ContributionsI am ineligible to deduct my traditional IRA contribution and decided to make a nondeductible contribution. I understand that I need to keep track of the nondeductible contribution, so as to prevent the amount from being taxed when distributed. Should I establish a separate traditional IRA for this?It is not necessary to establish a separate IRA for nondeductible contributions, as all your traditional, SEP and SIMPLE IRAs are treated as one IRA for purpose of determining the taxable amount of any distribution from either of those IRAs. For instance, assume you have three IRAs, one with $2,000 nondeductible contribution, another with $4,000 deductible contributions, and the third with $4,000 SEP IRA contribution. If you take a distribution of $2,000, the distribution will be prorated to include 1/5 nontaxable amount and 4/5 taxable amount, regardless of which of the traditional, SEP or SIMPLE IRA the distribution is taken from.
You must file IRS Form 8606 to keep track of the nontaxable (nondeductible) amounts. Form 8606 must also be filed for any year that you take a distribution from any of your traditional, SEP or SIMPLE IRA, so as to determine the taxable and nontaxable portion of the distribution. -
Employer sending money to IRACan my employer withhold money from my paycheck and send it to my IRA?Yes, they can. this amount would be deducted from your net pay/salary (the amount that you would receive on your paycheck). Find out if they will split your paycheck between more than one account for direct deposit. If they will, you can have a portion sent directly to your IRA (via direct deposit). If not, they may prefer to send a check to your IRA custodian/trustee with instructions to deposit the amount to your IRA. Not all employers want to accommodate such requests, as it is more ‘work’ for them. So while they can, they may choose not to accommodate such requests.
OTHER OPTION
Another option you can consider is to set up an automatic withdrawal from the account to which your paycheck is deposited and have the amount automatically deposited to your IRA. You would set this up so that the withdrawal is done after your paycheck is deposited. For example, assume that your paycheck is deposited to your checking account on the 15th and 30th of each month, you could schedule automatic withdrawals from your checking account a few days after your paycheck deposit dates, and have the bank deposit the amount to your IRA.
Whichever method you choose, follow-up with your bank to make sure the amount is deposited to your IRA as ‘IRA Contributions’. For amounts deposited during January 1 and April 15, notify the bank if you want those amounts to be treated as IRA contributions for the previous year.
You also want to make sure that your total contributions do not exceed the limit in effect for the year. Please click here to see limit https://retirementdictionary.live-website.com/definitions/ira -
IRA Contribution Not Mailed by DeadlineQ: When I filed my tax return for last year on April 15, I included my IRA contribution for last year which I claimed as a deduction. I was going through one of my drawers yesterday; I found the check that was supposed to be sent in to my IRA custodian, still in the addressed envelope. Is it possible for me to send in that contribution now for last year, since it was included on my tax return?A: No. The deadline for making your IRA contribution for last year April 15. For instance, the deadline for making your IRA contribution for 2015 is April 15, 2016[1]. This means that your contribution should have been delivered to your financial institution by April 15 of this year if hand delivered, or postmarked by then if delivered by mail.
Your tax return should be amended to remove the contribution.
[1]Extended to the next business day if deadline falls on a weekend or public holiday. For 2015 contributions, the deadline is April 18, 2016. -
Can I Defer my RMD Until I RetireI am 75 years old and still working. I make enough to cover my living and other expenses, and do not need (or want) to make withdrawals from my 401(k) accounts and pension savings, all of which are held with former employers. I was told that I could put off starting my required minimum distributions (RMD) for all of these accounts until I retire. Is that true?No. The option to defer starting your required minimum distribution (RMD) past age 72 until you retire only applies to the amounts that are held with the company that you currently work for.
For the amounts that are held with companies for which you are no longer an employee, your RMD amounts must be taken every year. If your current employer’s plans you to defer starting your RMDs until you retire and it allows rollovers from other plans, you can rollover your balances from those plans from your former employers into the plan held with your current employer. This would allow you to defer your starting your RMDs until you retire. If you are rolling over amounts from amounts held with your former employers, you must take the RMD due for the year before completing the rollover.
Note: The Option to defer RMDs past age 72 does not apply to IRAs, including SEP and SIMPLE IRAs.
Answer provided by “https://www.linkedin.com/in/deniseappleby” Denise Appleby, CISP, CRC, CRPS, CRSP, APA -
SEP IRA Effect on Active Participant StatusI am a sole proprietor. My small business has never had a retirement plan, but I just established a SEP on 3/3/11 and I am going to make a SEP contribution IN 2011 FOR 2010 tax year. My MAGI will be approx. $180K and I’d also like to make a deductible traditional IRA contribution. I saw a post on a bulletin board that suggested I could do this because active participant status for SEP plans is based on the timing of the SEP contribution not the tax year it is for. I just wanted to verify that I am understanding this correctly … on your website you refer to “active participant in a retirement plan” but the term used in the IRS instructions is “covered by a retirement plan” and I am wondering if those two phrases are synonymous or perhaps cover different situations. Thanks!Your understanding is correct. The two phrases “active participant status” and “covered by a retirement plan” mean the same thing for purposes of being able to take a tax deduction for a contribution to a traditional IRA.
SEP Contribution Rules and Active Participant Status
With a SEP IRA, you are usually considered an active participant for the year in which the SEP contribution is deposited to your SEP IRA. For instance, since you are depositing your 2010 SEP IRA contribution in 2011, you are considered an active participant for 2011. See footnote for exception [1. Therefore, unless you received contributions or benefits under another employer sponsored retirement plan for 2010 or in 2010 depending on the type of employer sponsored plan, your contribution to your traditional IRA for 2010 is fully deductible, regardless of your modified adjusted gross income (MAGI). For more on this, please see the article Active Participant Status–Can You Deduct Your IRA Contribution.
PS: We have updated our definition of active participant to address your question about whether it means the same thing as ‘covered by a retirement plan’.
This question was answered by http://applebyconsultinginc.com/DeniseAppleby.php Denise Appleby
[1] When profit sharing or SEP IRA contributions for two years are made in one year, the result is ‘active participant’ status for two years. While the general rule for profit sharing plans and SEP IRAs is that the individual is an active participant for the year in which the contribution is deposited to the profit sharing/SEP account, an exception applies. Under this exception, if contributions for two separate plan years are made in the same year, the contribution for the later year is deemed to be made in the next year. This prevents a participant from unintentionally circumventing the active participant status for one year when contributions for two years are made in the same year. -
Will distribution from Roth IRA Contribution be taxed?I just put $6,000 in a https://retirementdictionary.live-website.com/definitions/rothira Roth IRA CD as a contribution. These were funds previously taxed. When I withdraw these funds will they be taxed again?Answer
Distributions of amounts contributed to your Roth IRA are always tax-free. The earnings accrued on those amounts are also tax-free if the distributions are < https://retirementdictionary.live-website.com/definitions/qualifieddistributionrothira qualified. If the distributions are not qualified, the earnings will be taxable and will be subject to the 10% https://retirementdictionary.live-website.com/definitions/earlydistributionpenalty early distribution penalty, unless an https://retirementdictionary.live-website.com/definitions/earlydistributionpenaltyexception exception applies.
Bear in mind that under the https://retirementdictionary.live-website.com/definitions/orderingrulesrothira ordering rules, contributions are distributed first and earnings are distributed last. As such, if your distributions (over the years) do not exceed your aggregate contributions made over the years, the distribution amount will be tax and penalty free.
REMINDER: You can fund a Roth IRA, only if your https://retirementdictionary.live-website.com/definitions/modifiedadjustedgrossincomemagi modified adjusted gross income (MAGI) is below a certain amount. For these MAGI limits, click https://retirementdictionary.live-website.com/definitions/rothira” here.
Answer provided by http://applebyconsultinginc.com/ Appleby Retirement Consulting Inc. Appleby Retirement Consulting Inc provides Consulting, Coaching and Content on IRAs and other retirement plans to Financial, Tax and Legal professionals.
401K
Frequently Asked Questions Regarding
401ks
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72(t), SEPP Distributions from 401(k)I would like to take 72(t) payments from my 401(k) plan, but I have received conflicting information as to whether this can be done from a retirement account that is not an IRA. What is the right answer?
72(t) payments – also referred to as Substantially Equal Periodic Payments (SEPP) can be taken from IRAs, qualified plans-including 401(k) plans, and 403(b) accounts. However, while 72(t) payments can be taken from IRAs at any time, they can be taken from qualified plans and 403(b) accounts only after the participant has separated from service with the employer that sponsored the plan. Therefore, if you are still employed by the company that sponsored your 401(k) plan, you cannot take 72(t) payments from that account. But, if you are no longer employed by that company, then you may be able to take 72(t) payments from the account.
Please contact our office to help you determine if a 72(t) payment program is suitable for you.
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What is the least amount that can be withheld for tax from my distribution?Question I requested a https://retirementdictionary.live-website.com/definitions/distribution distributionof $20,000 from my retirement account and elected to have 7% withheld for federal tax. However, the custodian withheld 10% without my permission and informed me that they are required withhold 10%. Is that true?Answer
It depends. Distributions from your retirement account are subject to withholding rules. However, the withholding rules that apply depends on if the distribution represents a https://retirementdictionary.live-website.com/definitions/periodicpayment periodic payment or a https://retirementdictionary.live-website.com/definitions/nonperiodic-payment-nonperiodic-distribution non-periodic payment. Additionally, the payer may be required to apply a minimum withholding of 20% if the distribution is made from a https://retirementdictionary.live-website.com/definitions/qualifiedretirementplan qualified plan https://retirementdictionary.live-website.com/definitions/403bplan 403(b), or https://retirementdictionary.live-website.com/definitions/457plan 457(b) plan. For this purpose, periodic payments are defined as payments from a pension plan that are spread out over more than one year (periodic payments). Non-periodic payments are ad-hoc one-time distributions or distributions paid within one-year.
For periodic payments from a pension or https://retirementdictionary.live-website.com/definitions/annuityorannuitycontract annuity, the withholding amount is calculated using the same method that is used to determine withholding from salaries and wages, and you would simply instruct the payer on how much to withhold.
For non-periodic payments, the following applies:
• If the distribution is made from a https://retirementdictionary.live-website.com/definitions/traditionalira traditional IRA, https://retirementdictionary.live-website.com/definitions/simplifiedemployeepensionsepira SEP IRA, or https://retirementdictionary.live-website.com/definitions/simpleira SIMPLE IRA, the amount withheld for federal tax must be zero, 10% or more than 10%. As such, your IRA custodian did the right thing
• If the distribution was made from a https://retirementdictionary.live-website.com/definitions/rothira Roth IRA, withholding applies only to the taxable portion of the distribution, and the traditional IRA rules(above) would apply. However, a custodian may be unable to ascertain how much of a Roth IRA distribution is taxable
• If the account is a qualified plan, 403(b) or 457(b) plan, the following withholding rules apply
o If the amount is https://retirementdictionary.live-website.com/definitions/eligiblerolloverdistributionerd rollover eligible and is processed as a https://retirementdictionary.live-website.com/definitions/eligiblerolloverdistributionerd direct rollover to an eligible retirement plan, no withholding applies
o If the amount is rollover eligible and is paid to you, the payer is required to withhold at least 20% for federal taxes
o If the amount is not rollover eligible, the minimum withholding amount is 10%, unless you elect zero withholding.
The payer may also perform State tax withholding in addition to any federal tax withholding. Special rules apply to amounts that are sent overseas. These are explained in IRS Publication 515, available at http://www.irs.gov
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When can I withdraw assets from my qualified plan or 403(b) account?Question When can I withdraw assets from my https://retirementdictionary.live-website.com/definitions/qualifiedretirementplan qualified plan or https://retirementdictionary.live-website.com/definitions/403bplan 403(b) account?Answer
Generally, you can make withdrawals from these accounts only if you experience a https://retirementdictionary.live-website.com/definitions/triggeringevent triggering event. Triggering events are defined under the plan document or agreement. For instance, a plan may require that you reach the age of 59 ½ and/or terminate from employment with the employer in order to be eligible to make a withdrawal from the plan. Some plans are designed to allow in-service withdrawals, which allow you to make withdrawals before experiencing a traditional triggering event. In-service withdrawals may be limited to hardship situations, which would be defined under the plan. As such, you must check with the plan administrator or in the case of a 403(b) the custodian or annuity provider, to determine whether you are eligible to withdraw amounts from the plan. Hardship distribution amounts are not rollover-eligible.
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Roth IRA Distributions- Penalty Rules and age 59 1/2Question I have read a number of conflicting views on the Roth conversion issue that relates to people over 59½. So I turn to you. I am 62 years of age. I have had a regular Roth IRA for over five years. I have just rolled over my 403(b) into a Rollover IRA (I was told I could even though I am still employed). I am planning to convert a portion of this Rollover IRA into the Roth IRA. My question: If I convert the Rollover IRA to the Roth, do I still have to wait for five years before taking distributions from the converted Roth to avoid a 10% tax penalty? I am over 59½ at the time of this partial conversion.Answer
No. Since you will be at least age 59 ½ when the distribution occurs, the https://retirementdictionary.live-website.com/definitions/earlydistributionpenalty 10 % penalty will not apply.
Here is a good way to look at it:
Would the 10% penalty apply if the amount was withdrawn from the traditional IRA? If the answer is no, then the 10% penalty does not apply to the Roth IRA. If the answer is yes, then we would need to look at how much the converted amount has aged. If it has aged for less than five years, then the 10% penalty will apply unless you qualify for an exception.
In your case, the answer is no- the 10 percent penalty would not have applied had you left the amount in your traditional IRA and taken a distribution from your traditional IRA, because you are at least age 59 ½. Therefore, the 10% penalty would not apply to any distribution taken from any of your Roth IRAs.
Additional Information:
Since you are at least age 59 ½ and your first Roth IRA was established more than five-years ago, all your Roth IRA distributions will be qualified and therefore tax and penalty-free. A https://retirementdictionary.live-website.com/definitions/qualifieddistributionrothira qualified distribution is one that meets the following two requirements:
1. It occurs at least five years after the Roth IRA owner contributed to his/her first Roth IRA (for instance, if an IRA owner contributed to his/her Roth IRA for 2007, this five year period begins January 1,2007, providing the 2007 contribution is made by the deadline (generally April 15,2008)…and
2. Meets one of the following requirements
A. Occurs on or after the IRA owner reaches age 59
B. Occurs as a result of the Roth IRA owner being disabled (within the meaning of https://retirementdictionary.live-website.com/definitions/internalrevenuecode Internal Revenue Code Section 72(m
C. Is distributed to the beneficiaries of the Roth IRA owner as a result of the Roth IRA owner being deceased
D. Is used towards the purchase of a first-time home for the IRA owner or an eligible family member (limited to $10,000 for the IRA owner’s lifetime)
Therefore, since you are eligible for a qualified distribution from your Roth IRA, you need not be concerned with whether your conversion has aged for five years. The https://retirementdictionary.live-website.com/definitions/orderingrulesrothira ordering rules no longer apply to you, and all your Roth IRA distributions will be tax-free and penalty-free.
Your only concern now is whether it makes good financial sense to withdraw funds from your Roth IRA, especially since any earnings will accrue on a tax-free basis. It may be a good idea to talk to a competent
financial advisor. Your financial advisor should be able to help you decide if you should use funds from your other accounts/assets before withdrawing from your Roth IRA, or if it makes good financial sense to start tapping into your Roth IRA now. The answer will likely depend on your financial profile and your retirement horizon.
Good luck
Question answered by http://www.applebyconsultinginc.com/ Denise Appleby
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Social Security
Frequently Asked Questions Regarding
Social Security
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Beneficiary Planning
Frequently Asked Questions Regarding
Beneficially Planning
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Beneficiary Options- Roth IRA Vs. Traditional IRAAre the distribution options for beneficiaries of Roth IRAs the same as those that apply to beneficiaries of a Traditional IRA?
Beneficiary Options- Roth IRA Vs. Traditional IRA. Are they the same? It depends.
Traditional IRAs: The distribution options for beneficiaries of a traditional IRA depend on whether the IRA owner dies before the required beginning date (RBD).
Roth IRAs: Because Roth IRA owners are not subject to the required minimum distribution (RMD) rules, there is no RBD for Roth IRAs. Therefore, the distribution options for Roth IRAs are usually the same as those that apply to a Traditional IRA when the owner dies before the RBD. The IRA agreement must be consulted to be sure.
Some IRA agreements limit a spouse beneficiary’s options to treating the Roth IRA as his/her own, instead of choosing to treat the account as an inherited Roth IRA.
For quick reference guides and white papers on the beneficiary options, please visit https://www.irapublications.com/ -
Must I use the 5-year rule for my inherited IRA? I inherited it from my 72 year old uncle.I inherited a traditional IRA from my uncle in March of this year. He was age 72 when he died. I was told that I am required to take distributions from the inherited IRA under the 5-year rule. Is this true?
Must I use the 5-year rule for my inherited IRA?
You cannot be subject to the 5-year rule for an account that you inherited after 2019, unless you are a non-designated beneficiary. To determine your distribution options, you must first determine whether you are a non-designated beneficiary, a designated beneficiary, or an eligible designated beneficiary.
Key Factor
Because your uncle was age 72 this year and died this year, he died before he was supposed to start taking required minimum distributions (RMD). The date by which someone is supposed to start taking RMDs from an IRA is April 1 of the year following the year the IRA owner reaches age 72. This is referred to as the required beginning date(RBD). Therefore, if someone dies before April 1 of the year that follows the year he/she reaches (or would have reached) age 72, he/she died before the RBD.
You are therefore subject to the rules that apply when someone dies before the RBD.
Are you a Non-Designated beneficiary ?
A non-designated beneficiary is a beneficiary that is not a designated beneficiary. A non-designated is a non-person and includes an estate, charity or corporation.
If you inherit a retirement account through an estate (the estate is the named beneficiary and you inherit the retirements account assets through the estate), the distribution options are those that apply to a non-designated beneficiary.
For a retirement account inherited after 2019, the 5-year rule would apply only if the account was inherited by a beneficiary that is not a designated beneficiary and the account owner died before the required beginning date (RBD). A beneficiary that is not a designated beneficiary is commonly referred to as a non-designated beneficiary.
September 30th determination: The determination of whether an account is inherited by a non-designated beneficiary is made on September 30, of the year that follows the year in which the retirement account owner dies. If there are multiple beneficiaries one of which is a non-designated beneficiary, the account is treated as have a beneficiary that is a non-designated beneficiary, if there are nay non-designated beneficiary that did not fully distribute its share before September 30 of the year that follows the year in which the retirement account owner dies.
Are you a Designated Beneficiary?
You are a designated beneficiary is are not a non-designated beneficiary (see above).
If you are a designated beneficiary, you are subject to the 10-year rule . Under the 10-year rule, distributions are optional until December 31 of the 10th year that follows the year in which the retirement account dies, at which time the entire account balanced must be distributed from the account.
Are you an eligible designated beneficiary
You are an eligible designated beneficiary if you are either of the following
- Disabled,
- Chronically ill, or
- Not more than 10-years younger than your uncle
( There are other categories for eligible designated beneficiaries, but those do not apply to you)
If you are an eligible designated beneficiary, you may take distributions under the 10-year rule or the life-expectancy rule. In this case, you might be required to make an election by choosing one of the two, by December 31 of the year that follows the year in which the account owner died. -
Can a successor beneficiary take distributions over his life expectancy?My mom inherited an IRA from her father, and had been taking distributions over her single life expectancy. She named me, her son, as the beneficiary of her inherited IRA. Mom has since died and I have now inherited the IRA she inherited from her mom. Am I allowed to take distributions from this inherited IRA over my life-expectancy?Can a successor beneficiary take distributions over his life expectancy? Denise Appleby answers the question:
Response: No.
Because your mom’s IRA is an inherited IRA (beneficiary IRA), you are considered a successor beneficiary. Successor beneficiaries are not eligible to take distributions over their life expectancies.
As a successor beneficiary, your distribution options depend on whether your mom died before 2020.
We are now in 2021. Since you did not say when your mom died, I will respond to both possible scenarios:
Your mom died before 2020, and
Your mom died after 2019
If your mom died before 2020
If your mom died before 2020, you are eligible to take distributions over what remained of her life expectancy when she died.
Example 1: Susan inherited an IRA from her father in 2015.
Susan was age 40 in 2015. Susan elected to take distributions over her single life expectancy.
Susan’s life expectancy is based on her age in 2016 (the year after the year her father died), which makes it 37.9 (based on the single life expectancy table issued by the IRS each year in IRS Publication 590-B).
Because Susan is a nonspouse beneficiary, her life expectancy is non-recalculated, which means that one (1) is subtracted for each subsequent year. For example, Susan’s life expectancy for the following five years subsequent years would be:
2016 – 37.9
2017 – 36.9
2018 – 35.9
2019 – 34.9
Assume that Susan died in 2019. Her successor beneficiary would be eligible to continue taking distributions over her remaining life expectancy of 34.9 years.
Therefore, if your mom died before 2020, you would be eligible to take distributions over what remained of her life expectancy.
If your mom died before 2020, consult with your tax advisor regarding the life expectancy factor that you are required to use.
Important note: The life-expectancy tables changed for 2022 and after.
If your mom died after 2019
If your mom died after 2019, you are subject to the 10-year rule. Under the 10-year rule, you are permitted to choose whether to take distributions for the first nine years. But the entire inherited RIA balance must be distributed by December 31 of the 10th year that follows the year in which your mom died.
Example 1: Using the same facts as in example 1 above, except that Susan died in 2020.
Her successor beneficiary would be subject to the 10-year rule, which means that the entire account balance must be distributed by December 31, 2030. Her beneficiary may choose whether to take distributions from 2020 to 2029.
The distribution options for beneficiaries are complex, and making a mistake could result in penalties being owed to the IRS. Be sure to consult with your tax advisor for assistance with ensuring that you meet the distribution requirements.
The information provided above may not be used as tax or legal advice. -
RMD for year of deathI inherited an IRA from my uncle, who died earlier this year before taking his required minimum distribution (RMD).I am getting conflicting information about whether his RMD amount still needs to be distributed, and if so, who should take the distribution.Assuming that his RMD should still be taken, should it be taken by me or his estate?
If an IRA owner dies before taking his/her RMD, that RMD amount must be taken by the IRA owner’s beneficiary. As such, you must take your uncle’s RMD amount.
Your uncle’s RMD amount must be calculated as if he lived through to the end of the year.
IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. (Form 1099-R), must be issued for distributions taken from IRAs and other retirement accounts. Form 1099-R is issued to the IRS and the account owner who is responsible for including the distribution in income.
In this case, the Form 1099-R for the amount must be issued under your Social Security number, and must be added to your income for the year in which the distribution occurs.
Please note: You must withdraw your uncle’s RMD by the end of the year. If you miss this deadline, you will owe the IRS an excess accumulation penalty of 50% of the amount not withdrawn (by the deadline).
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RMD for Year of DeathI Inherited an IRA from my father who died January 5, 2013. He was 75 years old at the time of his death and did not take his required minimum distribution (RMD) before his death.I have received conflicting information about his RMD for 2013. One source informed me that this RMD should be paid from his IRA to his estate and reported under his social security number. Another informed me that I must withdraw the amount from my Inherited IRA to which I will transfer the amount. What is the correct response?The second answer is correct. As his beneficiary, you are required to take his 2013 RMD from the IRA that you inherit from him. The amount must be reported under your tax identification number, as it should be included in your income. Generally, you are required to transfer the amount to your Inherited IRA to ensure proper tax reporting of the distribution. Bear in mind that even though he has died, the amount must be calculated as if he had lived to the end of the year.
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Does the absence of the decedent’s name in an inherited IRA, invalidate the inherited IRA?Question An individual inherited an IRA from his father, and transferred the IRA to an IRA at another firm. However, the IRA to which the transfer was made does not include his father’s name. I understand that as a result (of his father’s name being missing from the registration), the transfer is actually a distribution that is taxable to him when the transfer occurred. Is that true?Answer
No. It is true that the IRS requires the inherited IRA to include the name of the decedent in the registration, to show that the account once belonged to the decedent. This also serves as a reminder to all stakeholders that the account is an inherited IRA, which means it is likely that the account is not eligible to receive a https://retirementdictionary.live-website.com/conrtibution.htm contribution [other than a https://retirementdictionary.live-website.com/Direct-rollover.htm direct rollover contribution on behalf of the https://retirementdictionary.live-website.com/Beneficiary.htm beneficiary of a https://retirementdictionary.live-website.com/Qualified-Retirement-Plan.htm qualified plan, https://retirementdictionary.live-website.com/403-b-plan.htm 403(b) account or https://retirementdictionary.live-website.com/457-plan.htm 457(b) plan]; and it allows the beneficiary to identify the source of each IRA he or she holds for purposes of figuring the taxation of a distribution from the IRA, including exclusion from current year gross income as an https://retirementdictionary.live-website.com/Eligible-rollover-distribution2.htm eligible rollover distribution. But nowhere does it state that the absence of the decedent’s name will result in the https://retirementdictionary.live-website.com/Transfer.htm trustee to trustee-transfer being treated as a https://retirementdictionary.live-website.com/Distribution.htm distribution.
There are other – more important- elements that makes an IRA an ‘inherited IRA’ or ‘beneficiary IRA’.
These include:
• Coding the account as an inherited IRA for tax reporting purposes. This involves hard-coding the account so that all distributions are reported with a Code 4 in box 7 of IRS https://retirementdictionary.live-website.com/1099-plan.htm Form 1099-R.
• Coding the account so that it cannot receive IRA contributions.
Therefore, the first thing you (or the IRA owner) need to do is check with the custodian to determine if:
• The account was coded as an inherited IRA for tax reporting purposes
• The only assets in the account are the assets from any transfers (from the decedent’s retirement accounts).
If the answer is yes in both cases, then all you need to do at this point is show the custodian proof that the assets were transferred (not distributed) from an IRA ( in the name of the decedent) to that IRA, and instruct them to correct the registration to include the name of the decedent.
If the account was not coded as an inherited IRA, and the only assets are in the account are the assets that transferred from the decedent’s IRA, then you need to:
• Provide the custodian with the supporting documentation to show that the assets were transferred (not distributed) from the decedent’s IRA to that IRA
• If any distributions were already taken from the beneficiary’s IRA that were not coded as a ‘death distribution’, instruct the custodian to issue a corrected 1099-R with the correct coding.
• Instruct the custodian to add the name of the decedent to the account registration and code the account as an inherited IRA.
If the assets were commingled with non-inherited IRA assets, then you have a problem and would need the assistance of a retirement plans expert to determine if and what type of corrective measures can be taken.
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I inherited a traditional IRA from my uncle who was 65 years old when he died. Can I rollover or transfer ……..I inherited a traditional IRA from my uncle who was 65 years old when he died. Can I rollover or transfer the account to my own IRA? My uncle died in July of last year.No. You cannot rollover or transfer an Inherited IRA to your own IRA, because you are a non-spouse beneficiary. A non-spouse beneficiary is defined as a beneficiary that is not the surviving spouse of the deceased IRA owner. As a non-spouse beneficiary of an IRA owner who died before his required beginning date (RBD), you are required to have the amount moved to an inherited IRA. An inherited IRA is one that is registered in the name of your uncle’s ( the decedent) and your names, using your social security number. An example of a registration that satisfies the IRS requirements is: IRA FBO Jim P, Beneficiary of Tom S (Deceased)”. Any variation of this will work, as long as it is clear who is the beneficiary and who is the decedent. Some financial institutions may shorten ‘beneficiary’ to read ‘bene’, ‘beneficiary of ‘to read ‘B/O’ and/or ‘deceased’ to read ‘decd’.
Depending on the financial institution’s operational requirements, you may need to move the assets to a new account number, or they may reregister the same account number used by your uncle. Any method will satisfy IRS requirements, as long as distributions are reported in your social security number. If the assets are moved to a new account number, it should be done on a non-reportable basis, i.e. it should not be done as a distribution or contribution.
Your distribution options are as follows:
- Distribute the assets over yourlife-expectancy. Under the life expectancy method, you must take a required minimum distribution (RMD) amount each year. Your first RMD amount would be due by December 31 of this year (the year after your uncle died). You can withdraw more than the RMD amount- up to the entire balance – at anytime.
- Distribute the assets under thefive-year rule. Under the five year rule, the entire balance must be distributed by December 31, of the 5th year, following the year your uncle died. Since he died in 2007, the assets must be fully distributed by December 31, 2012. Distributions before then are optional.
If you fail to withdraw your RMD amount by the deadline, you will owe the IRS an excess accumulation penalty of 50% of your RMD shortfall. For instance, if your RMD for the year is $10,000, and you withdraw only $2,000, you will owe the IRS an excess accumulation penalty of $4,000 ($8,000 x 50%).
Distributions from your inherited IRA cannot be rolled over; however, you can transfer amounts to another inherited IRA, providing the receiving inherited IRA is registered in both your’s and your uncle’s name. -
Can an IRA contribution be made for a deceased individual?Can an IRA contribution be made now (for last year) on behalf of (for) , an individual who died in December of last year?There is no official guidance on whether an IRA contribution can be made to a decedent’s IRA (that is, a contribution being made to an individual’s IRA after the individual dies). The only indication of the IRS’ position on this matter is private letter ruling (PLR) 8439066, in which the IRS ruled that the decedent’s estate could not contribute to the decedent’s IRA for the year of death, if the contribution is being made after the individual died. Obviously, had the IRA owner contributed the amount before death, it would have been OK .
The question then becomes, would the contribution be allowed for the previous tax-year if the individual died after the end of the year? Say- January of this year? It appears not. In the same PLR, the IRS stated that “Since the taxpayer is deceased, the contribution made by the decedent’s estate would not be a contribution for retirement purposes”, which suggests that any contribution after death is not allowed. The IRS goes on to say ( in the PLR) that “Section 1.408-2(a) of the Income Tax Regulations specifies the person who may establish and maintain an IRA to include an individual, an employer, or an employee association. The regulations do not provide that the decedent’s personal representatives, the decedent’s estate, or beneficiaries of the decedent’s estate can establish or maintain and IRA on behalf of an individual. This is because the primary purpose of the IRA is for retirement.”
In sum, the IRS is saying that a deceased person has no need for retirement funds, therefore making additions in the form of contributions to a deceased individual’s IRA is not permitted. They also explained that making such a contribution would create an “excess IRA contribution”, subject to a 6% penalty if not removed from the IRA by the applicable deadline.
A PLR cannot be cited as precedence or legal reference, but gives a good idea of how the IRS would treat a case with a similar fact pattern. -
My client’s four children are the beneficiaries of his IRA. They each split their share of the inherited IRA into separate inherited IRAs the year following ….My client’s four children are the beneficiaries of his IRA. They each split their share of the inherited IRA into separate inherited IRAs the year following the year he died ( he died last year and they split the account this year). There is some disagreement as to whether they must use the oldest beneficiary’s life expectancy to calculate their distributions for this year, or if they can use their own life expectancies? In fact, we are looking at two books, and one says the oldest beneficiary’s life expectancy must be used, and the other says each beneficiary can use their own. Can they use their own life expectancies? Or are they required to use the life expectancy of oldest beneficiary?Each beneficiary can use his/her own life expectancy to calculate his/her RMD amount for this year.
The confusion may have come about, because when the Final RMD regulations were issued, it required the life expectancy of the oldest beneficiary to be used in such cases (i.e. for the year of the split, when the split occurred in the year following the year of death). However the IRS subsequently issued regulations modifying that provision, allowing each beneficiary to use their own life expectancy in the year of the split.
Cite TD 9130 -
My client inherited an IRA from his aunt in 2006. She was 75-years of age when she died. However he did not understand the rules and …My client inherited an IRA from his aunt in 2006. She was 75-years of age when she died. However, he did not understand the rules and failed to distribute his required minimum distribution (RMD) amount by the December 31 ,2007 deadline. What should he do?If an individual fails to distribute his RMD by the deadline, he will owe the IRS an excess accumulation penalty of 50% of the shortfall. The excise tax is reported on IRS Form 5329 and IRS Form 1040 (your income tax return).
If the client missed the deadline due to a reasonable cause, he may ask the IRS to waive the 50% excise tax, by attaching a letter of explanation to his completed Form 5329. He should include proof that he has taken steps to remedy the issue by withdrawing the amount. Proof of the withdrawal should be included with his request.
If the IRS approved his request, he would not need to pay the excess accumulation penalty -
Can my client use the five-year rule to take distributions from the IRA? The owner was age 80 when he diedMy client inherited an IRA from his father who died at age 80. Can my client use the five-year rule to take distributions from the IRA?
No. The five-year rule is not an option when the IRA owner dies on or after the required beginning date (RBD).
Also, for IRAs inherited after 2019, the 5-year rule would apply only to a non-person beneficiary, where the owner died before the RBD.
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How does a spouse beneficiary elect to treat the inherited IRA assets as his/her ‘own’?How does a spouse beneficiary elect to treat the inherited IRA assets as his/her ‘own’?The treat-as-own option , which applies only to a spouse who is the sole primary beneficiary, allows for the transfer of the inherited IRA balance to the surviving spouse’s ‘own’ non-inherited IRA. It also allows the surviving spouse to redesignate the decedent’s IRA to an IRA in his/her name in addition to effecting the removal of the decedent’s name from the account registration. The actual procedure is determined by the guidelines contained in the financial institution’s operational procedures. Alternatively, a surviving spouse is deemed to have made the election if, at any time, either of the following occurs —
- Any amount in the IRA that would be required to be distributed under the beneficiary option is not distributed within the applicable deadline or
- The spouse makes contributions to the IRA
The result of the treat-as-own option is that the IRA is treated as if it was established and funded by the spouse, instead of being inherited.
Notes:
- If the inherited IRA is a SIMPLE IRA, it cannot be moved from under a SIMPLE until it had been at least two-years since the first contribution was deposited to the deceased participant’s SIMPLE IRA.
- If the IRA is a Roth IRA, the IRA-agreement should be consulted to determine the options available to the spouse beneficiary. Some documents require the spouse beneficiary to treat the inherited Roth IRA as his/her own, i.e., the spouse does not have the option to treat the Roth IRA as an Inherited-Roth IRA
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Can I Roll-Over an Inherited IRA?I inherited a traditional IRA from my uncle who was 65 years old when he died. Can I rollover or transfer the account to my own IRA? My uncle died in July of last year.No. You cannot rollover or transfer an IRA that you inherited from your uncle to your own IRA, because you are a non-spouse beneficiary. A non-spouse beneficiary is defined as a beneficiary that is not the surviving spouse of the deceased IRA owner. Instead , you may transfer the funds to an Inherited IRA . An Inherited IRA is one that is registered in the names of the decedent and the beneficiary ( in this case, your name and your uncle’s { the decedent} name), using your social security number. An example of a registration that satisfies the IRS requirements is: IRA FBO Jim P, Beneficiary of Tom S (Deceased)”. Any variation of this will work, as long as it is clear who is the beneficiary and who is the decedent. Some financial institutions may shorten ‘beneficiary’ to read ‘bene’, ‘beneficiary of ‘to read ‘B/O’ and/or ‘deceased’ to read ‘decd’.
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