By Andy Ives, CFP®, AIF®
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The Ed Slott team hosted a highly successful training program for members of Ed Slott’s Elite IRA Advisor Group℠ and Ed Slott’s Master Elite Advisor Group℠ last week in Las Vegas. Over 300 financial advisors from across the country attended. Feedback on the educational material provided was positive, with one attendee saying he “never felt more empowered” in his 18-year career. Topics of conversation over the two-and-a-half-day program ran from IRS Notice 2022-53 (which waived the penalty for 2021 and 2022 RMDs within the 10-year period) to net unrealized appreciation to QCD substantiation requirements. Here are a handful of other topics that garnered significant discussion.
Excess IRA Contributions. While the cap on IRA and Roth IRA contributions will move from $6,000 to $6,500 in 2023 for those with earned income, IRA owners are sure to erroneously exceed the limit. Reasons for making an excess contribution are far and wide. Maybe a person contributed to a Roth IRA thinking they were under the income phase-out limit, but then earned a large year-end bonus that pushed them over the limit. Maybe they contributed to a traditional IRA but failed to realize the contribution could not be deducted based on their income and participation in a company work plan. Maybe the IRA owner rolled over dollars (like a required minimum distribution) that was not permitted to be rolled over.
Regardless of the reason why the excess was made, corrective action must be taken. During the conference, all possibilities and options for fixing the error were discussed. The excess contribution could be recharacterized to a different type of IRA, i.e., from Roth to traditional, or vice versa. The excess could be carried forward to a subsequent tax year, or the excess could be removed. Whether or not the 6% penalty applied, whether IRS From 5329 was necessary to be filed, and how to handle any earnings on the excess contribution was also covered.
Roth 401(k) to Roth IRA Rollovers. This remains the shortest question with the longest answer: “What considerations must be made when rolling a Roth 401(k) to a Roth IRA?” We could have spent a half day of the conference discussing the applicable factors in this transaction alone. How old is the account owner? How long has he held the Roth 401(k)? Does he have a Roth IRA? How long has that Roth IRA been in existence? Each of these questions requires a response. Each response leads down a different path. Only after contemplating the answers can a proper decision be made. The Roth 401(k) distribution will either be qualified or not. This will directly impact whether the account owner will have penalty- and tax-free access to the dollars after the rollover to the Roth IRA. (And this doesn’t even approach the necessary conversation about other reasons to potentially leave plan dollars in a plan or roll them to an IRA.)
Mistakes That Can Be Fixed. In addition to excess contributions, we covered a laundry list of over 30 retirement account mistakes that can be fixed. This included items such as trust beneficiary problems, 60-day rollover errors, 1099-R coding questions, missed RMDs and “bad” beneficiaries. Likewise, a list of dreaded “fatal errors” was presented. These are mistakes where there is no going back, no fix, no do-over. Roth conversions, prohibited activity and many other “unfixable” transactions fall into this category.
The message was clear: IRA and retirement account regulations are complicated. Be sure to work with an advisor who can navigate the incredibly complex rules and their permutations.