Backdoor Roth IRA Baggage

Cornerstone is pleased to bring you this article by Ed Slott and Company, LLC. As a member of Ed Slott’s Elite IRA Advisor Group™ Gordon keeps Cornerstone professionals on the cutting-edge of retirement, tax law, and IRA distribution planning through continuous training with Ed Slott and his team of IRA Experts.

Membership includes immediate notification of changes to the tax code and updates on retirement planning, and 24/7 access to Ed Slott and Company, LLC to confer with on complex cases. Just one of the tools in the Cornerstone arsenal that helps you avoid unnecessary taxes and fees on your retirement dollars! As always, give us a call if you’d like to discuss!

BACKDOOR ROTH IRA BAGGAGE

A Backdoor Roth IRA strategy is when high-income earners – those over the Roth IRA income threshold ($230,000 – $240,000 for those married filing joint in 2024; $146,000 – $161,000 for single filers) – can make non-deductible contributions to a traditional IRA and then convert the traditional IRA to a Roth, thereby circumventing the income limitations. (We can expel the notion that this is a step transaction or that a Backdoor Roth IRA is on the precipice of illegality. In 2018, a tax law specialist with the IRS Tax-Exempt and Government Entities Division stated that Backdoor Roth IRAs will not be challenged by the IRS.)

You may have heard, “If your income is too high for a direct Roth IRA contribution, just do a Backdoor Roth.”

 

Easy-peasy, right? Maybe not. 

 

Backdoor Roth IRA baggage

A Backdoor Roth IRA transaction can carry a lot of “Backdoor baggage,” including:

1. The Pro-Rata Rule – No Cherry Picking. The pro-rata rule dictates that when an IRA contains both nondeductible (after-tax) and deductible (pre-tax) funds, each dollar withdrawn (or converted) from the IRA must contain a percentage of tax-free and taxable funds. This ratio is based on the percentage of after-tax dollars in all of a person’s traditional IRAs, SEP and SIMPLE plans. You can’t target just the after-tax IRA dollars and only convert those. Additionally, once you have after-tax dollars (basis) in your IRA, getting it cleaned out could require some heavy lifting. For example, the entire account could be converted, but that might be a tax hill too steep to climb. Or, the pre-tax dollars could be segregated by rolling them into a 401(k). But this assumes access to a 401(k) that allows a rollover into the plan.

2. Multiple Tax Forms.Every Backdoor Roth transaction creates three or four tax forms. When a non-deductible contribution is made to an IRA, you must declare that there are after-tax dollars in the account. This is done on IRS Form 8606. Failure to file Form 8606 could result in double taxation. When dollars leave a traditional IRA via conversion, a 1099-R is generated the following year. Form 5498 is also created the next year to document the conversion. And when tax time comes around, the same Form 8606 is used to document the pro-rata math and how much of the conversion is taxable.

3. Crossing Tax Years. What if you make a prior-year (2023) non-deductible IRA contribution in January 2024, but then immediately convert? That will require a Form 8606 for the 2023 tax return to claim the basis. The conversion will generate a 1099-R and 5498 (issued in 2025) for the 2024 tax return, and a second Form 8606 must be filed with the 2024 return documenting the pro-rata math. Four forms. (Yes, good tax software can certainly help.)

Be aware that, until the after-tax dollars are cleared out of a traditional IRA, it’s your (the taxpayer’s) responsibility to track the basis. And, if you’re a high earner who continues to make (and convert) non-deductible contributions each year, the annual baggage of a Backdoor Roth IRA can pile up and follow you like an overloaded luggage cart with a wobbly wheel.

By Andy Ives, CFP®
IRA Analyst, Ed Slott, LLC

This information, developed by an independent third party, has been obtained from sources considered to be reliable, but Raymond James Financial Services, Inc. does not guarantee that the foregoing material is accurate or complete. Changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Copyright ©2024, Ed Slott and Company, LLC Reprinted from The Slott Report, January 31, 2024 with permission. https://www.irahelp.com/slottreport/how-do-youreport-2023-roth-ira-contributions-your-tax-return-answer-may-surprise-you-0. Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.

Raymond James is not affiliated and does not endorse Ed Slott and Company, LLC, The Slott Report, or Andy Ives.

Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Time is Running Out for 2023 QCDs

Time is Running Out for 2023 QCDs

Cornerstone is pleased to bring you this article by Ed Slott and Company, LLC, an organization providing IRA education and analysis to financial advisors, institutions, consumers, and media across the country. Our association with this organization helps us stay up to date on the latest developments in IRA and tax law. As always, give us a call if you’d like to discuss!

If done correctly, a QCD can satisfy your required minimum distribution (RMD) for the year and help reduce your income taxes

If you are charitably inclined and have an IRA, you might want to consider doing a Qualified Charitable Distribution (QCD) for 2023. If done correctly, a QCD can satisfy your required minimum distribution (RMD) for the year and help reduce your income taxes. The deadline for a 2023 QCD is fast approaching – December 31, 2023. Many custodians have even earlier cutoffs. Don’t miss out on this valuable tax break. Here is what you need to know.

  •   You must be age 70 ½.

IRA owners who are age 70½ and over are eligible to do a QCD. This is more complicated than it might sound. A QCD is only allowed if the distribution is made on or after the date you actually attain age 70 ½. It is not sufficient that you will turn 70 ½ later in the year.  

  •   You can be a beneficiary and do a QCD.

QCDs are not limited to IRA owners. An IRA beneficiary may also do a QCD. All the same rules apply, including the requirement that the beneficiary must be age 70 ½ or older at the time the QCD is done. 

  •   QCDs are only allowed from IRAs.

You may take QCDs from your taxable IRAs funds. QCDs are also permitted from SEP and SIMPLE IRAs that are not ongoing. An ongoing SEP and SIMPLE plan is defined as one where an employer contribution is made for the plan year ending with or within the calendar year in which the charitable contribution would be made. QCDs are not available from an employer plan. 

  •   There is a $100,000 annual limit for 2023.

QCDs are capped at $100,000 per person, for 2023. For a married couple where each spouse has their own IRA, each spouse can contribute up to $100,000 from their own account. 

  •  You can satisfy your RMD with a QCD.

A QCD can satisfy your required minimum distribution (RMD) for the year. A QCD can be more than the RMD amount for the year as long as it does not exceed the $100,000 annual limit. 

  •   Only taxable IRA funds are eligible.

QCDs apply only to taxable amounts. No basis (nondeductible IRA contributions or after-tax rollover funds) can be transferred to charity as a QCD. QCDs are an exception to the pro-rata rule which usually applies to IRA distributions. 

  •   You must do a direct transfer.

If you want to do a QCD, you must make a direct IRA transfer from the IRA to the charity. If a check that is payable to a charity is sent to you for delivery to the charity, it will qualify as a direct payment. 

  •   New rules allow QCDs to split interest entities.

A QCD can be made to a charity which is eligible to receive tax-deductible charitable contributions under IRS rules. The QCD rules are not available for gifts made to grant-making foundations or donor-advised funds. The contribution to the charity would have had to be entirely deductible if it were not made from an IRA. A taxpayer does not have to itemize deductions, but the gift to the charity still has to meet all of the deductibility rules.

New rules for 2023 allow a QCD to a split interest entity such as a charitable gift annuity. This can only be done in one year of your lifetime and is limited to $50,000 for 2023. 

  •   The charitable substantiation requirements apply.

You should have documentation to substantiate the donation (something in writing from the charity showing the date and amount of the contribution and a statement that you received nothing of value in return). 

  •   You must report the QCD on your tax return.

The IRA custodian will not be separately reporting the QCD. There is no code or box on the 1099-R to identify the QCD. It will be up to you to let the IRS know about the contribution by including certain information on your tax return.

5 Areas of Comprehensive Financial Planning

Are you aware of – and taking advantage of – every opportunity to reduce your tax burden?

By coordinating all five areas of wealth management, a Cornerstone Plan gives you the confidence to achieve the dreams calling to you. We would be honored to help you with:

  • Retirement Planning, including 401k analysis
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  • Investment & Portfolio Management
  • Estate planning, including business succession & exit strategies
  • Insurance Planning

Get #CornerstoneConfident – book a financial planning strategy appointment today by calling 605-357-8553. 

Membership in Ed Slott’s Elite IRA Advisor Group™  is one of the tools our advisors use to help you avoid unnecessary taxes and fees on your retirement dollars. Gordon attends in-depth technical training on advanced retirement account planning strategies and estate planning techniques. And semiannual workshops analyzing the most recent tax law changes, case studies, private letter rulings, Congressional action and Supreme Court rulings help keep attendees on the cutting-edge of retirement, tax law and IRA distribution planning. Through his membership, Gordon is immediately notified of changes to the tax code and updates on retirement planning, and he has 24/7 access to Ed Slott and Company LLC to confer with on complex cases.

This information, developed by an independent third party, has been obtained from sources considered to be reliable, but Raymond James Financial Services, Inc. does not guarantee that the foregoing material is accurate or complete. Changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Copyright ©2023, Ed Slott and Company, LLC Reprinted from The Slott Report, December 13, 2023 with permission. Author: By Sarah Brenner, JD, Director of Retirement Education, Ed Slott & Company. https://www.irahelp.com/slottreport/time-running-out-2023-qcds. Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article. Raymond James is not affiliated and does not endorse Ed Slott and Company, LLC, The Slott Report, The Elite Advisor Group™, or Sarah Brenner, JD.

CSP #361807 Exp 12.15.24

Confusion over RMD Distribution

Confusion Over Required Minimum Distributions (RMDs)

Cornerstone is pleased to bring you this article by Ed Slott and Company, LLC, an organization providing IRA education and analysis to financial advisors, institutions, consumers, and media across the country. Our association with this organization helps us stay up to date on the latest developments in IRA and tax law. As always, give us a call if you’d like to discuss!

To the surprise of many, the IRS released proposed SECURE Act regulations last year requiring beneficiaries (on some occasions) to take required minimum distributions (RMDs) during the 10-year payout period.

In the past, most non-spouse beneficiaries could “stretch” RMDs from inherited accounts over their own single life expectancy. RMD rules for 2023 are more confusing, thanks to the 2019 SECURE Act passed by Congress, and IRS proposed regulations of Feb. 23, 2022.

The 2019 SECURE Act included the 10-year payout rule, requiring most retirement account beneficiaries for deaths in 2020 or later to empty the retirement account by the end of the 10th year following the year the account owner died.

The IRS issued proposed regulations on February 23, 2022, taking the position that when death occurs on or after the required beginning date (RBD), a non-eligible designated beneficiary must take annual RMDs and empty the account under the 10-year rule.

The rule requiring annual RMDs when an account owner dies on or after her RBD is sometimes called the “at least as rapidly” (ALAR) rule. While it does not require the beneficiary takes the same amount that the IRA owner was taking, it does require that the process of taking RMDs continue. This interpretation surprised many who thought the 10-year rule would apply like the pre-SECURE Act 5-year rule, which did not require annual RMDs.

 

How has the IRS responded to RMD confusion?

The IRS has waived some RMD penalties when certain beneficiaries fail to take an RMD due to a reasonable error. Waivers are only applicable to RMDs within the 10- year period and you are usually required to file Form 5329 to request a waiver. For 2023, SECURE 2.0 reduces the penalty from 50% to 25% of the amount not taken. The penalty is further reduced to 10% if the missed RMD is taken and the penalty is paid during a 2-year correction window.

Last year, the IRS issued Notice 2022-53, which waived penalties for missed 2021 and 2022 RMDs within the 10-year period, for deaths that occurred in 2020 or 2021. Recently, the Service released Notice 2023- 54, extending the penalty waiver to cover missed 2023 RMDs when the death occurred in 2020 or 2021. It also excuses the penalty for missed 2023 RMDs when the death took place in 2022.

Although the Notice does not state this directly, it appears that since the penalty is waived, the 2023 RMD, like 2021 and 2022 RMDs within the 10-year period, doesn’t have to be taken. It also appears that these missed RMDs within the 10-year period will not have to be made up. (Note that if these RMDs were already withdrawn, they cannot be returned or rolled over.)

Example:

Lola died in 2020 at age 75 with a traditional IRA. Her adult daughter, Anabella, is a non-eligible designated beneficiary subject to the 10-year rule under the SECURE Act.

WHY?  The proposed regulations say that because Lola died after her RBD, Anabella must take RMDs based on her single life expectancy during years 1-9 of the 10-year period. However, Notice 2022-53 says that if Anabella failed to do so for 2021 and 2022, there is no penalty on the missed RMDs. Notice 2023-54 extends this relief to the 2023 RMD. If Anabella had already taken a distribution, believing she needed to take an RMD for 2023, she may not roll over those funds. Notice 2023-54 also provides relief to successor beneficiaries subject to RMDs within the 10-year rule.

Example:

Dave died in 2019 at age 90 with a traditional IRA. As designated beneficiary his adult son, Russell, can take annual RMDs from the IRA because Dave died before the SECURE Act became effective.

Russell dies in 2020. His son Theodore, the successor beneficiary, is subject to the SECURE Act and the 10-year rule, and must also take RMDs based on Russell’s single life expectancy during years 1-9 of the 10-year period. However, Notice 2022-53 said that if Theodore failed to take his 2021 or 2022 RMD, there would be no penalty. Notice 2023-54 extends this relief to 2023 RMDs. Beneficiaries who inherited a Roth IRA do not need this relief. Under the IRS proposed regulations, anyone who inherits a Roth IRA is deemed to have inherited from a person who died before his RBD. This is because Roth IRA owners are not subject to lifetime RMDs. Most Roth IRA beneficiaries are still subject to the 10-year rule, but RMDs are not required for years 1-9.

 

Does Notice 2023-54 waive all RMDs for 2023?

No. The Notice doesn’t affect lifetime RMDs, inherited IRAs by eligible designated beneficiaries (EDBs), or RMDs by beneficiaries who inherited before 2020.

Example: Monica has an IRA. She is 80 years old and must take a lifetime RMD for 2023. If Monica fails to do so, Notice 2023-54 doesn’t provide any relief from the penalty.

Example: Arthur inherited an IRA from his mother in 2018. Arthur has been taking RMDs each year based on his single life expectancy. Because he inherited prior to the SECURE Act, Arthur can continue the stretch. However, if he fails to take an RMD in 2023, Notice 2023- 54 does not relieve him from the penalty.

 

Should every beneficiary who is eligible for the IRS relief skip their RMD for 2023?

Anyone who is eligible for this relief also has the 10-year deadline looming. So, while it may be tempting to skip an RMD for 2023, that could mean more pain later when a big tax bill comes due at the end of the 10-year holding period.

 

Does the recent guidance tell us what will happen with RMDs during the 10-year period in the future?

The IRS is not tipping its hand. The latest notice says, “Final regulations regarding RMDs will apply for calendar years beginning no earlier than 2024.” Hopefully, those final regulations will arrive sooner rather than later and offer clear direction.

 

Which IRA owners get more time to complete a rollover?

While Notice 2023-54 mainly addressed RMD confusion during the 10-year rule for beneficiaries, it also provided very targeted relief to a specific group of IRA owners — those born in 1951. The Notice extends the 60-day rollover deadline for these IRA and plan account owners affected by the SECURE 2.0 increase in the first RMD age from 72 to 73.

Under the old rule, the first RMD year for account owners born in 1951 would have been 2023. Under SECURE 2.0 it is now 2024.

Some IRA custodians and plan administrators inadvertently paid out “RMDs” in 2023 to these people. Because these weren’t technically RMDs, and the account owners may not have wanted them, the IRS gives these account owners additional time (beyond the usual 60-day period) to roll back distributions received between January 1, 2023, and July 31, 2023. The extended deadline is September 30, 2023.

Such a rollover will not violate the once-per-year IRA rollover rule if another distribution was received by the individual in the last 12 months that was also rolled over. It will start a new 12-month period that will preclude a distribution received in the next 12 months from being rolled over.

Example: Mick reached age 72 in 2023. He was unaware that SECURE 2.0 delayed the RMD age to 73. On January 10, 2023, he took a distribution from his IRA, believing he needed to take an RMD for 2023. Mick realized his error a few weeks later. Mick has until September 30, 2023, to roll over this distribution if he so chooses. If Mick had already done a rollover of another distribution received in the last 12 months, that will not preclude him from rolling over the 2023 RMD distribution “mistake.” However, going forward, any distribution Mick takes from any IRA before January 10, 2024, will not be rollover eligible.

Membership in Ed Slott’s Elite IRA Advisor Group™  is one of the tools our advisors use to help you avoid unnecessary taxes and fees on your retirement dollars. Gordon attends in-depth technical training on advanced retirement account planning strategies and estate planning techniques. And semiannual workshops analyzing the most recent tax law changes, case studies, private letter rulings, Congressional action and Supreme Court rulings help keep attendees on the cutting-edge of retirement, tax law and IRA distribution planning. Through his membership, Gordon is immediately notified of changes to the tax code and updates on retirement planning, and he has 24/7 access to Ed Slott and Company LLC to confer with on complex cases.

This information, developed by an independent third party, has been obtained from sources considered to be reliable, but Raymond James Financial Services, Inc. does not guarantee that the foregoing material is accurate or complete. Changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Copyright ©2023, Ed Slott and Company, LLC Reprinted from The Slott Report, August 14, 2023 with permission. https://www.irahelp.com/slottreport/rmd-relief-no-thank-you. Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article. Raymond James is not affiliated and does not endorse Ed Slott and Company, LLC, The Slott Report, The Elite Advisor Group™, or Sarah Brenner, JD.

CSP #328338 Exp 11.7.24

7 Rules for Inherited IRAs

7 RULES FOR INHERITED IRAS

Cornerstone is pleased to bring you this article by Ed Slott and Company, LLC, an organization providing IRA education and analysis to financial advisors, institutions, consumers, and media across the country. Our association with this organization helps us stay up to date on the latest developments in IRA and tax law. As always, give us a call if you’d like to discuss!

By Sarah Brenner, JD
Director of Retirement Education, Ed Slott and Company, LLC

Many IRA assets will ultimately go to nonspouse beneficiaries. When these beneficiaries inherit the funds, special rules kick in. Inherited IRAs are not like your own personal IRA account.

Seven rules for inherited IRAs that may surprise you if you are a nonspouse beneficiary:

1. You cannot contribute to your inherited IRA. You cannot make contributions to an inherited IRA. If you do have your own IRA, you cannot add those funds to the Inherited IRA or vice versa.

2. You can move your inherited IRA. If you are unhappy with the investment choices or the custodian, you can move your inherited IRA to another custodian, and you can select different investment options. However, you must move the account by direct transfer, and the new account must be an inherited IRA as well. As a nonspouse beneficiary, you cannot take a distribution and then roll it over within 60 days.

3. You may be able to do a QCD. If you are charitably inclined, you may be able to take advantage of a qualified charitable distribution (QCD) and move up to $100,000 of your IRA funds (annually) directly to the charity of your choice in a tax-free transfer. To do a QCD you must be 70 ½ or older.

4. You cannot convert your inherited IRA. Many times nonspouse beneficiaries are interested in having a Roth IRA. Unfortunately, the rules do not allow nonspouse IRA beneficiaries to convert inherited IRAs to Roth IRAs.

5. You may be subject to annual required distributions, or the 10-year rule at a minimum. You can’t keep the funds in your inherited IRA forever. If you inherited the IRA funds in 2020 or later, as a nonspouse beneficiary you will most like be subject to a 10-year payout-period, possibly with annual RMDs during the 10 year period. Certain eligible designated beneficiaries who inherit in 2020 or later and those beneficiaries who inherited prior to 2020 may be still be able to stretch RMDs over life expectancy.

6. Your distributions may be taxable, but there will be no penalty. Inherited IRAs are never subject to the 10% early distribution penalty. However, if you inherit a traditional IRA, it is likely that the distributions you take will be taxable. If you inherit a Roth IRA, you are more fortunate from a tax perspective. Distributions from an inherited Roth IRA will most likely be tax-free.

7. You should name a successor beneficiary. When you inherit an IRA, it makes sense to name a beneficiary. If you don’t, the default provisions in the IRA document are likely to apply. In many cases this would mean the funds would go to your estate which can mean more taxes and the time and expense of probate.

Gordon Wollman and Ed Slott

Gordon Wollman, Founder and President of Cornerstone Financial Solutions, and Raymond James Wealth Advisor, with Ed Slott at the 2023 Spring workshop for members of Ed Slott’s Elite and Master Elite IRA Advisor Group℠.

Membership in Ed Slott’s Elite IRA Advisor Group(TM)  is one of the tools our advisors use to help you avoid unnecessary taxes and fees on your retirement dollars. Gordon attends in-depth technical training on advanced retirement account planning strategies and estate planning techniques. And semiannual workshops analyzing the most recent tax law changes, case studies, private letter rulings, Congressional action and Supreme Court rulings help keep attendees on the cutting-edge of retirement, tax law and IRA distribution planning. Through his membership, Gordon is immediately notified of changes to the tax code and updates on retirement planning, and he has 24/7 access to Ed Slott and Company LLC to confer with on complex cases.

This information, developed by an independent third party, has been obtained from sources considered to be reliable, but Raymond James Financial Services, Inc. does not guarantee that the foregoing material is accurate or complete. Changes in tax laws or regulations may occur at any time and could substantially impact your situation.

ACKNOWLEDGMENT: This article was published in The Slott Report on irahelp.com by Ed Slott and Company, LLC, an organization providing timely IRA information and analysis to financial advisors, institutions, consumers, and media across the country and is distributed with its permission. Copyright ©2023, Ed Slott and Company, LLC Reprinted from The Slott Report, September 06, 2023, with permission https://www.irahelp.com/slottreport/rules-inherited-iras-may-surprise-nonspouse-beneficiaries. Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.

Raymond James is not affiliated with and does not endorse the opinions or services of of Sarah Brenner, JD, The Slott Report, ED Slott, Ed Slott and Company, LLC, IRA Help, LLC, irahelp.com, or Ed Slott’s Master Elite IRA Advisor Group. Members of Ed Slott’s Elite IRA Advisor Group(SM) train with Ed Slott and his team of IRA Experts on a continuous basis. These advisors passed a background check, complete requisite training, attend semiannual workshops, webinars, and complete mandatory exams. They are immediately notified of changes to the tax laws.

Avoiding Spousal Beneficiary Mistakes

AVOIDING SPOUSAL BENEFICIARY MISTAKES

5 Easy Steps

Cornerstone is pleased to bring you this article by Ed Slott and Company, LLC, an organization providing IRA education and analysis to financial advisors, institutions, consumers, and media across the country. Our association with this organization helps us stay up to date on the latest developments in IRA and tax law. As always, give us a call if you’d like to discuss!

Who is a spouse beneficiary?

 

A spouse beneficiary:

    • Must be married to the account owner at the time of the account owner’s death, and
    • Must be named on the beneficiary form (or inherit directly through the document default provisions).

 As a spouse beneficiary you have unique options:

1. Split the inherited account if necessary. As a spouse beneficiary, you can take advantage of the special spousal rules if you are the sole beneficiary of an IRA account.

If other beneficiaries have been named, the spouse can still take advantage of these special provisions by transferring their portion of the inherited IRA to a separate account by December 31st of the year following the year of the IRA owner’s death.

2. Will you need money prior to age 59½. If so, you will likely want to remain a beneficiary of the inherited account. Death is an exception to the 10% early distribution penalty. So, by staying as a beneficiary you can avoid paying the 10% penalty.

The account should be retitled as a properly titled inherited IRA. As a spouse that remains a beneficiary you do not need to take RMDs from the account until the year the deceased spouse would have turned 73.

3. Transfer the inherited IRA into a spouse beneficiary’s account. As a spouse beneficiary you should generally roll the inherited IRA into your name. Once a younger spouse beneficiary reaches age 59½, there’s no advantage to remaining a beneficiary, and a spousal rollover or transfer should be done.

NO other beneficiary has this option. By doing this rollover or transfer, a surviving spouse ensures that eligible designated beneficiaries will be able to stretch distributions over their own life expectancies.

4. Name new beneficiaries. As the surviving spouse you should name your own beneficiaries. If no beneficiaries have been named and the surviving spouse dies, the remaining assets will pass according to the default provisions in the custodial document. This is frequently the estate of the now deceased spouse, which could require a shorter payout period for beneficiaries or add unnecessary time and expenses by tying the assets up in probate.

5. Consider a disclaimer. Before taking any action regarding an inherited IRA, as a surviving spouse you should evaluate whether a full or partial disclaimer would be advantageous. By using a disclaimer, some or all of the inherited IRA can be passed to contingent beneficiaries, potentially extending the stretch IRA and reducing the future impact of estate taxes for eligible designated beneficiaries.

Gordon Wollman and Ed Slott

Gordon Wollman, Founder and President of Cornerstone Financial Solutions, and Raymond James Wealth Advisor, with Ed Slott at the 2023 Spring workshop for members of Ed Slott’s Elite and Master Elite IRA Advisor Group℠.

Membership in Ed Slott’s Elite IRA Advisor Group(T)  is one of the tools our advisors use to help you avoid unnecessary taxes and fees on your retirement dollars. Gordon attends in-depth technical training on advanced retirement account planning strategies and estate planning techniques. And semiannual workshops analyzing the most recent tax law changes, case studies, private letter rulings, Congressional action and Supreme Court rulings help keep attendees on the cutting-edge of retirement, tax law and IRA distribution planning. Through his membership, Gordon is immediately notified of changes to the tax code and updates on retirement planning, and he has 24/7 access to Ed Slott and Company LLC to confer with on complex cases.

This information, developed by an independent third party, has been obtained from sources considered to be reliable, but Raymond James Financial Services, Inc. does not guarantee that the foregoing material is accurate or complete. Changes in tax laws or regulations may occur at any time and could substantially impact your situation. ACKNOWLEDGMENT: This article was published by Ed Slott and Company, LLC, an organization providing timely IRA information and analysis to financial advisors, institutions, consumers, and media across the country and is distributed with its permission. Copyright 2023, Ed Slott and Company, LLC. Raymond James is not affiliated with and does not endorse the opinions or services of Ed Slott or Ed Slott and Company, LLC.

 Raymond James is not affiliated with and does not endorse the opinions or services of ED Slott, Ed Slott and Company, LLC, IRA Help, LLC, or Ed Slott’s Master Elite IRA Advisor Group. Members of Ed Slott’s Elite IRA Advisor GroupSM train with Ed Slott and his team of IRA Experts on a continuous basis. These advisors passed a background check, complete requisite training, attend semiannual workshops, webinars, and complete mandatory exams. They are immediately notified of changes to the tax laws.

Five New Opportunities for Tax-Free Growth and Withdrawals

Cornerstone is pleased to bring you this article by Ed Slott and Company, LLC, an organization providing IRA education and analysis to financial advisors, institutions, consumers, and media across the country. Our association with this organization helps us stay up to date on the latest developments in IRA and tax law updates. As always, give us a call if you’d like to discuss!

Twenty-five years ago, Roth IRAs first became available, offering the promise of tax-free earnings and withdrawals. Since then, Roth options have exploded. Employer plans can now offer Roth options and income limits on Roth conversions are long gone. The recently enacted SECURE 2.0 has made it clear that the trend toward more Roth accounts becoming available for retirement savings is accelerating. Roth-O-Mania has arrived!

Here are five new Roth savings opportunities introduced by SECURE 2.0:

  1. Roth Employer Plan Contributions

Most 401(k) (and other workplace retirement savings plans) provide for employer contributions. These contributions are either matching contributions for participants who make salary deferrals, or across-the-board nonelective contributions for all eligible participants.

Until now, employer contributions, including matches on Roth salary deferrals, have been required to be made to a pre-tax account within the plan. However, beginning in 2023, SECURE 2.0 allows for employer contributions to be made to Roth accounts.

Roth employer contributions are allowed in 401(k), 403(b) and governmental 457(b) plans. SECURE 2.0 makes clear that employers are not required to make their contributions on a Roth basis. It is optional, not mandatory. SECURE 2.0 also provides that only vested matching or nonelective contributions can qualify for Roth treatment. For tax purposes, Roth employer contributions will be treated the same as Roth employee contributions. That is, employees will be taxed on the amount of the Roth contribution.

Roth employer contributions are allowed in 401(k), 403(b) and governmental 457(b) 

 

  1. Roth SEPs and SIMPLEs

Many small business owners offer SEP or SIMPLE IRA plans for their employees. SEP IRAs provide only employer contributions. SIMPLE IRAs provide both employer contributions and employee contributions. Employers with SEP or SIMPLE plans have always been required to make contributions on a pre-tax basis. However, beginning in 2023, SECURE 2.0 permits both SIMPLE and SEP Roth IRA contributions.

Employees can now make SIMPLE Roth IRA salary deferrals similarly to the way participants in an employer plan can make Roth contributions (if the plan allows). SIMPLE Roth contributions made by employees are includible in taxable income for the year of the contribution.

SEP and SIMPLE Roth employer contributions may also be offered. If the Roth option is offered, employees can choose to treat employer SEP and SIMPLE contributions as Roth.

 

  1. No Lifetime RMDs for Roth Plans

Beginning in 2024, SECURE 2.0 eliminates the need to take lifetime required minimum distributions (RMDs) on Roth plan dollars. This brings Roth plan RMD rules more in line with Roth IRA RMD rules.

Participants in workplace plans — like a 401(k) or 403(b) — will no longer have to factor their Roth plan dollars into their lifetime RMD calculation. This could result in a significant reduction in the plan RMD from 2023 to 2024.

Additionally, plan participants will no longer be forced to roll over Roth plan dollars to a Roth IRA to avoid taking an RMD on those Roth assets. Does this mean that rolling a plan to a Roth IRA is no longer a good option? Not necessarily. Rolling over the funds to a Roth IRA may still be the best choice due to a multitude of other factors – such as more favorable Roth IRA distribution ordering rules, investment options, easier access, etc.

Roth plan participants will join Roth IRA owners in not being subject to lifetime RMDs. However, beneficiaries of a Roth plan, like Roth IRA beneficiaries, are subject to the RMD rules. With either a Roth plan account or a Roth IRA, any distribution to a beneficiary will likely be income tax free. However, after the SECURE Act, most non-spouse beneficiaries will be subject to the 10-year rule that requires the inherited Roth funds to be fully withdrawn by the end of the 10th year after death.

 

  1. Rollovers from 529 Plans to Roth IRAs

SECURE 2.0 allows rollovers from 529 plans to Roth IRAs beginning in 2024. For those who have concerns about what to do with funds “left over” in a 529 plan, this may be a good opportunity. Leftover 529 funds can now be rolled over to a Roth IRA in the name of the 529 beneficiary.

These rollovers from 529 plans to Roth IRAs would not be subject to the income restrictions that normally apply to Roth IRA contributions. However, there are many restrictions. The 529 plan must have been in place for at least 15 years. Rollover amounts cannot include any 529 contributions (and earnings on those contributions) made in the preceding five-year period. Annual rollovers cannot exceed the annual Roth IRA contribution limit, and total lifetime rollovers cannot exceed $35,000.

 

  1. Required Roth Catch-Up Contributions

Beginning in 2024, SECURE 2.0 requires any age 50-and-older catch-up contributions made to 401(k), 403(b) or 457(b) plans by certain higher-paid participants to be made as Roth contributions. This includes a participant whose wages received from the plan sponsor for the preceding calendar year exceeded $145,000 (as indexed). Individuals who are not in this group can choose to make catch-up contributions as Roth contributions (if the plan allows) but are not required to do so. 

The Future is Roth

In the past several years, we have seen several legislative proposals put forward that would have limited the availability of Roth accounts. For example, there were proposals to do away with back-door Roth conversions and proposals that would have added income limits for Roth conversions.

None of these proposals that would have cut back on Roth accounts found their way into SECURE 2.0. The reason is clear: Congress is desperate for revenue, and Roth accounts raise immediate tax dollars. In fact, four of the five new Roth rule changes discussed in this article can be found in “Title VI — Revenue Provisions” in the SECURE 2.0 law. Roth-O-Mania is likely here to stay, and with it comes more opportunities for tax-free growth and withdrawals for savvy retirement savers.

Gordon Wollman and Ed Slott

Gordon Wollman, Founder and President of Cornerstone Financial Solutions, and Raymond James Wealth Advisor, with Ed Slott at the 2023 Spring workshop for members of Ed Slott’s Elite and Master Elite IRA Advisor Group℠.

Membership in Ed Slott’s Elite IRA Advisor Group(T)  is one of the tools our advisors use to help you avoid unnecessary taxes and fees on your retirement dollars. Gordon attends in-depth technical training on advanced retirement account planning strategies and estate planning techniques. And semiannual workshops analyzing the most recent tax law changes, case studies, private letter rulings, Congressional action and Supreme Court rulings help keep attendees on the cutting-edge of retirement, tax law and IRA distribution planning. Through his membership, Gordon is immediately notified of changes to the tax code and updates on retirement planning, and he has 24/7 access to Ed Slott and Company LLC to confer with on complex cases.

This information, developed by an independent third party, has been obtained from sources considered to be reliable, but Raymond James Financial Services, Inc. does not guarantee that the foregoing material is accurate or complete. Changes in tax laws or regulations may occur at any time and could substantially impact your situation. ACKNOWLEDGMENT: This article was published by Ed Slott and Company, LLC, an organization providing timely IRA information and analysis to financial advisors, institutions, consumers, and media across the country and is distributed with its permission. Copyright 2023, Ed Slott and Company, LLC. Raymond James is not affiliated with and does not endorse the opinions or services of Ed Slott or Ed Slott and Company, LLC.

 Raymond James is not affiliated with and does not endorse the opinions or services of ED Slott, Ed Slott and Company, LLC, IRA Help, LLC, or Ed Slott’s Master Elite IRA Advisor Group. Members of Ed Slott’s Elite IRA Advisor GroupSM train with Ed Slott and his team of IRA Experts on a continuous basis. These advisors passed a background check, complete requisite training, attend semiannual workshops, webinars, and complete mandatory exams. They are immediately notified of changes to the tax laws.