Denise Appleby (00:00):

Another Jamaican expression, which I think is actually international, “Prevention is better than cure.” Don’t feel overwhelmed by all this. I mean, would you remove your own kidney? No right? You would go to a professional to get it done and you’ve worked so many years to save for retirement. Don’t let it all go down the drain because of one mistake.

Denise Appleby (00:24):

And just like with everything else, there are people who specialize. You want to talk to an advisor who specializes in IRAs. And so, they’re IRA smart and they know the answer and know where to get the answer in time.

[Music Playing]

Stephanie McCullough (00:44):

Hey, dear listeners, we need to let you know that Kevin and Stephanie offer investment advice through Private Advisor Group, which is a federally registered investment advisor. The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations to any individual. To determine which strategies or investments may be suitable for you. Consult the appropriate qualified professional prior to making a decision. Now, let’s get on with the show.

Stephanie McCullough (01:19):

This is Take Back Retirement, the show that’s redefining retirement for women. Retirement is an old-fashioned cultural concept. We want to reclaim the word so you can make it your own. I’m Stephanie McCullough, financial planner and founder of Sofia Financial, where our mission is to reduce women’s money stress and empower them to make wise holistic decisions so they can get back to living their best lives.

Kevin Gaines is my longtime colleague with deep knowledge in the technical stuff: investments, taxes, retirement plan rules. He’s a little bit giggy and quantitative, I’m a little bit touchy-feely and qualitative. Together, through conversations and interviews, we aim to give you the information and motivation you need to move forward with confidence. We’re so glad you’re here.

Stephanie McCullough (02:08):

Coming to you semi live from the beautiful Westlakes Office Park in suburban Philadelphia, this is Stephanie McCullough and Kevin Gaines of Sofia Financial and American Financial Management Group. Say hello, Kevin.

Kevin Gaines (02:18):

Hello Kevin. Today we have with us Denise Appleby. Denise is a nationally known and well-respected expert on IRA’s, retirement plans for small businesses and distributions and rollovers from employer plans. She has over 20 years’ experience in the retirement plan field and has authored several books and written over 700 articles on IRA roles and regulations. She also has a website called retirementdictionary.com, which provides free information about IRAs.

Stephanie McCullough (02:53):

Hmm. Good to know. So, Kevin, just to give listeners a little help, we’re going to do a couple quick definitions for some of the stuff that we geeks on this stuff fell into with Denise. So, listeners, you’re going to hear us use the word custodian and that is a particular role in the financial services industry.

Stephanie McCullough (03:11):

For example, your 401(k) custodian, the company that actually holds the money might be Fidelity or Vanguard or T. Rowe Price. Like. These companies that you hear of. Or you might have an IRA with your local bank or Schwab, right. These are the custodians.

Kevin Gaines (03:28):

And most times, not all times, but most times, their name’s actually going to be on the title of the account. It’ll say Fidelity Investments custodian, FBO for benefit of and your name.

Stephanie McCullough (03:42):

The other thing that we talk a lot about is RMDs required minimum distributions, which are the IRS rules about when you have to start taking money out of IRAs and 401(k)s. Because for a lot of these, unless they’re Roth, and we’ll link to our previous episodes on this, you haven’t paid tax on this money yet. And the IRS gets impatient. They say we want our money. So, that’s all about the calculations and the timing of when you have to start taking money out. Alright, without any further ado, let’s talk to Denise.

Kevin Gaines (04:16):

Denise, welcome. And thank you for joining us.

Denise Appleby (04:19):

Oh my gosh, thank you so much for having me on. I admire what you do, and I feel honored to be here. Thank you.

Kevin Gaines (04:29):

So, let’s start with a real simple question. As we approach year-end, is there really a whole lot of things we got to worry about when it comes to retirement accounts?

Denise Appleby (04:43):

I wouldn’t say a whole lot, but they’re important enough for us to pump the brakes and say, “Let me take care of this stuff that I’ve been putting off for months.” Because most people are like me. Don’t tell anybody that I said it, but I’m a procrastinator.

Denise Appleby (05:00):

I leave things for the last minute. But you know what? When I’m on a tight deadline, the juices just flow for me. And that works well if you’re working on a project. That does not work well, if you have to go to your custodian and get certain things done. right.

Denise Appleby (05:17):

So, there’s some transactions that are related to IRAs and employer plans that have to get done by the end of the year. Some are optional, Roth conversions. Your CPA might have done an analysis and say, “Oh, Kevin, oh Stephanie, this is the year that you should do a Roth conversion.”

Denise Appleby (05:37):

And so, if you miss the deadline, you miss the good year to get it done. Then there are other transactions where you better do them or you’re going to owe the IRS excise taxes.

Stephanie McCullough (05:49):

Which nobody wants.

Denise Appleby (05:50):

Nobody wants, right. That’s part of what we should touch on today. Who would be subject to excise tax? And of course, we’re talking about required minimum distributions for account owners, required minimum distributions for beneficiaries.

Denise Appleby (06:07):

But here’s the one that people always miss, right. And this is the first time they’re probably going to hear this because right now a taxpayer owes the IRS, I think eight and a half million dollars in excise tax because he rolled over an amount from his employer plan to an IRA that was considered an ineligible rollover.

Denise Appleby (06:31):

And when you make an ineligible rollover to your IRA, the law is you got to correct it by your tax filing due date plus extension as a return of excess. If you miss that deadline, you owe the IRS a 6% excise tax. Guess what? That 6% excise tax continues to accrue for every year that the excess remains in the account.

Denise Appleby (06:58):

So, when I have conversations about year end, we talk about the RMDs, so beneficiaries and retirement account owners, we talk about Roth conversions and I remind people, audit that IRA and see if last year, did you make a rollover to your IRA that’s ineligible?

Denise Appleby (07:19):

Did you miss the deadline? Because if you miss the deadline, there is a second deadline that’s coming up and that’s the deadline for year end where if you miss that, you’re going to be subject to a 6% excise tax. It’s subject to a statute of limitation now where once you file your 1040, it starts at six-year statute of limitations. Before Secure 2.0, the statute of limitation used to be started by filing form 5329 and Congress said, “Who knows that you’re supposed to file form 5329 to start the statute of limitation?” Nobody.

Kevin Gaines (07:55):

Who even knows what form 5329 is.

Stephanie McCullough (07:59):

I was going to ask. I don’t know what it is.

Denise Appleby (08:00):

I know. When I’m talking to groups of hundreds of people and I ask, maybe you’ll see one person put up their hand. And so, they agree that, let’s start it with something that everybody files your 1040. So, there is a six-year statute of limitation, but still, don’t you want to avoid the 6% excise tax from the get go [Stephanie McCullough overcross: Yeah]? That’s a lot of money.

Denise Appleby (08:25):

If you want to make a donation to the IRS, fine. But if you want to keep that money in your pocket, then audit your IRA transactions. See whether or not you had ineligible rollovers of RMDs. Did you break the one per year IRA rollover rule? Did you miss the 60-day deadline? But you still rolled over your contribution anyway and you don’t qualify for a waiver of the 60-day deadline.

Denise Appleby (08:52):

Then if you didn’t fix those as return of excess by your tax filing due date plus extension for 2023, then you got to remove that by the end of the year to avoid the 6% excise tax. So, that’s number one. Which one do you want us to talk about next?

Stephanie McCullough (09:07):

Well, let me just back up for a second. So, those are the three ways that your rollover could become ineligible if you miss that 60-day deadline.

Denise Appleby (09:15):

Yeah. Those are only three.

Stephanie McCullough (09:17):

Of the many ways?

Denise Appleby (09:28):

Yeah. So, if you roll return of excess that can’t be rolled over. If–When you take a distribution from an IRA and roll it back to the same type of IRA, like traditional to traditional, Roth to Roth, you can do that only once during a 12-month period [Stephanie McCullough overcross: okay]. But once upon a time, Stephanie, we used to tell people, “Oh. If you have 10 IRAs, you can do that 10 times.” Right?

Stephanie McCullough (09:43):

Yeah.

Denise Appleby (09:44):

How do we know that’s not true? A tax attorney broke the rules.

Stephanie McCullough (09:50):

Oh my gosh.

Denise Appleby (09:51):

Yeah. It wasn’t his fault. And so, someone at the IRS is reviewing his tax return and said, “Mr. Bobrow, how come you have two of these forms, two 1099-Rs, two 5498s, which are the forms that are used to report these transactions?”

Denise Appleby (10:08):

And he said, ‘Because I did two IRA rollovers,” and the IRS said, “no, but you can do only one.” And he said, “You’re joking.” IRS publication 590, which is published for the man in the street because a tax code is written in such a complex manner, publication 590 says you can do it twice if you have two IRAs. And so, he took the IRS to court and the tax court said, “IRS is right. Publication 590 is wrong.” That’s something else that we want to tell people, right?

Stephanie McCullough (10:38):

Oh, my gosh.

Denise Appleby (10:40):

Because so many consumers feel like they’re empowered, they don’t need you guys. Because all this information is out there. But I’ll give you an example. When Mr. Bobrow appealed, he said to the tax court, “You can’t penalize me because I used IRS publications.” And you know what the court said to him? “You use IRS publications at your own peril.”

Stephanie McCullough (11:02):

Oh lovely. Oh my gosh. Seriously.

Kevin Gaines (11:04):

Please, please say that one more time because when I first heard about the case, this blew everybody’s mind in the room when this came up.

Denise Appleby (11:13):

I know. Because here’s the thing, the IRS will tell you, “Yes, we write those publications and it’s our interpretation of the tax code and regulations, but you can’t rely on it. It’s not official.” So, unless we’re giving you a revenue ruling or a revenue procedure, don’t come tell me that you got this from the IRS because we’re not going to back that up, okay.

Denise Appleby (11:42):

And that’s one of the primary reasons why consumers must talk to financial advisors and their tax professionals before they do these things. And they got to interview them. How much do you know about IRAs? Because I don’t care how smart you are, if you’re not IRAs smart, you can’t advise on IRAs because then we’re going to be in trouble.

Denise Appleby (12:03):

Because let me tell you something, the majority of advisors who come to me for help, it’s because they have a client where somebody who didn’t know about IRAs misadvised them, or they felt that they can do it on their own. And so, they did. And so, here we are. And most of those can’t be fixed.

Stephanie McCullough (12:22):

So, there was a time, way back when, before I started doing this job 27 years ago when I worked for the federal government. And I was always baffled at the rules that we as civil servants had to follow because it was like Congress came up with regulations and then instead of like getting rid of them and writing new ones, they just piled stuff on top of each other. And we had these crazy things that we had to live with. And I feel the tax code might be something like that.

Denise Appleby (12:48):

It is because here’s all the tax code works. You’re looking at this section and it says in order to do transaction A you go to code section so and so, then you go to code section so and so and code section so and so says, “Okay, but then you got to go over there,” and it’s just like this … have you ever seen those balls of, uh, rubber bands intertwined?

Stephanie McCullough (13:15):

Yes.

Denise Appleby (13:15):

That’s how it is. And that’s why they need people like you guys because you spend time figuring this out so that you can simplify it for your clients, right. And help your clients avoid mistake.

Denise Appleby (13:29):

Can I tell you another story?

Stephanie McCullough (13:29):

Please.

Kevin Gaines (13:30):

Please.

Denise Appleby (13:31):

That one per year rule that I just talked about; I had a case last year where this person was some real estate investor. Take the money out of the IRA, put it back. Now, I just talked about the fact that this can be done only once. He did it 16 times.

Stephanie McCullough (13:51):

Okay.

Denise Appleby (13:52):

He didn’t know. Smart man. Brilliant. But not IRA brilliant. Can I tell you another story about [Stephanie McCullough overcross: Yup] just this one rule? This taxpayer saw a nice house that they wanted, and they currently owned a home already, So, but they didn’t have any money to buy the second home.

Denise Appleby (14:12):

And you know how it is. If you see a home that looks great, somebody else wants it too [Stephanie McCullough overcross: right]. Everybody wants something. And so, he said to the real estate agent, “Man, I don’t have any money to buy that house and I’m afraid somebody else is going to buy it. And all I have is my IRA.” And the real estate agent said, “Take the money off your IRA, buy the house that you like, make yourself happy, you know, one life to live, YOLO, and all that.

Denise Appleby (14:41):

And then when you sell the house that you live in, you just take the money and put it back. Simple.” Guess what?

Kevin Gaines (14:46):

What could go wrong?

Denise Appleby (14:48):

Didn’t sell by the 60-day deadline. So, now when you miss a 60-day deadline, there are certain circumstances where the IRS said, “Okay, we’re not that tough. We’re going to extend the deadline.” He goes to the IRS asked for an extension and he said, “It’s not my fault. My real estate agent told me to do it. My financial advisor didn’t tell me about these rules.”

Denise Appleby (15:10):

And the IRS says, “I don’t care. They’re not supposed to tell you anything. Yeah, you are the administrator of your IRA.” Now, had this been like a 401(k) plan, it might’ve been a little bit different because a 401(k)-plan administrator is required to say to you, that money that you’re taking out, got to put it in within 60 days or you’re going to owe income taxes on it. That requirement does not apply to an IRA.

Denise Appleby (15:35):

And so, here he was holding a big fat check that he had to include, he had to include in income because he couldn’t roll it over anymore. And he paid the IRS a $12,500 fee to get a ruling. They said, “No deal. We’re keeping your 12,500.” And of course, he got professional help this time to get the private letter ruling. So, he had to pay professional fees as well.

Stephanie McCullough (16:02):

Yeah. I guess the individual, it’s like so much things that are you know do it yourself now, the I for individual means it’s on you.

Denise Appleby (16:11):

Yeah. I’m so glad you said that. One of the things that we have been waiting on is the final regulations for Secure Act 1.0 that was signed into law in 2019, like about the last — about the 20th of December. Finally, this year they issued final RMD regulations.

Denise Appleby (16:32):

You know what I noticed? Part of what they have confirmed based on some of the rules that they have changed is when it comes to your IRA, you are the plan administrator. If it’s your 401(k), there is a designated talent administrator who’s responsible for making sure that your 401(k) operate within the confines of a tax law.

Stephanie McCullough (16:57):

Yeah.

Denise Appleby (16:59):

And that makes sense because you know why? If something goes wrong with one person’s account under a 401(k) plan, not in all cases, but it could blow up the entire 401(k). Like if all of us are under the 401(k) plan [Stephanie McCullough overcross: right]  All of our accounts get blown up now, we’re looking at [Stephanie McCullough overcross: Yeah] having to include amount in income.

Denise Appleby (17:18):

Whereas with an IRA, if something goes wrong, it’s just that one person’s IRA. But yes, the final RMD regulations have pretty much confirmed what people like you, Kevin, and you Stephanie, know that when it comes to IRAs, the IRA owner is the person that’s primarily and finally responsible for making sure that things are done right. Doesn’t matter who they point the finger at, they’re the ones who are going to be responsible for treating unintended distribution as income for the year and paying any excise taxes, et cetera.

Kevin Gaines (17:52):

Denise, I’d like to talk about one other way that people can get their RMD wrong or do an illegal rollover because Stephanie and I see this one frequently or have conversations with people who do this recently, is RMD has to be the first dollars out of your retirement account. So, right now we’re talking, if you are over the age of this year, it happens to be 73.

Denise Appleby (18:21):

73.

Kevin Gaines (18:23):

But the first dollars out has to be your RMD. You can do Roth conversions before you take your distribution. And not everybody understands that.

Denise Appleby (18:35):

Not everybody understands that. And I’m going to bet you both of you lunch, I’m going to bet you lunch that by March 15th of next year, I am going to get at least two calls where people have made that mistake.

Denise Appleby (18:49):

So, you are absolutely right. If someone is at least age 73 this year, they have to take an RMD from their own account for this year, right. If they’re in a 401(k) plan and they’re still employed by that employer, the plan may allow them if they’re eligible to put off RMDs until they retire.

Denise Appleby (19:11):

But ordinarily, if you’re at least aged 73 this year, you have an RMD for this year. Now here’s what you can’t do. You can’t say to your 401(k) plan administrator, “Oh, my RMD’s 10,000, why don’t you send a hundred thousand to my IRA as a rollover and I’ll take the 10,000 later.”

Denise Appleby (19:31):

Can’t do that. You can’t say to your IRA custodian “Convert a hundred thousand from my IRA and then I’ll take the RMD later.” Because as you rightly said, Kevin, your first money that comes out of your account as a distribution includes your RMD until your RMD has been satisfied.

Denise Appleby (19:50):

So, if you do a Roth conversion this year and you didn’t take your RMD, that Roth conversion includes your RMD amount. If you rolled over an amount from your IRA to another IRA or from your employer plan to your IRA and you didn’t take your RMD before the rollover, then that rollover includes your RMD. And I’ll tell you another story. These things keep happening to me.

Denise Appleby (20:16):

This gentleman rolls over his 401(k) to his IRA. His RMD was like a million dollars. Can you believe it? I want a 401(k) like that where my RMD’s a million dollars.

Stephanie McCullough (20:29):

Right. Sign me up.

Denise Appleby (20:31):

So, he does a direct rollover from his 401(k) to his IRA because that’s how we want him to do it, right. Because when you do that, you avoid the 20% withholding. After he did that, the plan administrator sends him a letter and say, “Oops, that money that you rolled over includes your RMD of a million dollars.”

Denise Appleby (20:52):

Now when that happens, the first thing you need to do is contact the IRA custodian and say, “Listen, that big chunk of money that I rolled over includes my RMD. How do we fix that?” The custodian says to him, “Just let it stay. It will come out in the wash.”

Denise Appleby (21:11):

So, yeah, he’s telling somebody else’s story. And they said, “That don’t sound right, call Denise.” Come to find out the custodian actually said that. And not only that, they put it in writing, they put it in writing.

Denise Appleby (21:25):

So, how do you fix something like that when you find out that you have done a Roth conversion and you didn’t take your RMD first, or you’ve done a rollover, and you didn’t take your RMD first. And those funds are in your IRA, you have to remove it as a return of excess contribution by your tax filing due date plus extension. Otherwise, you’re going to be subject to the 6% excise tax.

Denise Appleby (21:47):

Now, if he had listened to that IRA custodian and don’t do anything, he wouldn’t think he had to fix anything. Because if you think it’s right, you’re not going to try to fix it. There’s nothing broken. So, a million dollars times 6% times six years, that’s what we are looking at. He would owe the-

Stephanie McCullough (22:08):

That’s a big number.

Denise Appleby (22:10):

That’s a big number.

Kevin Gaines (22:12):

Yeah. I mean, and that’s the scary thing, it’s these little things where we can get tripped up, you know. When these examples you’re talking about, you’re not talking about people who are trying to game the system. They were doing what they honestly thought, and apparently in some cases the IRS even thought, you could legally do.

Denise Appleby (22:33):

Yeah. I have so many stories. Tell me when you want me to stop.

Stephanie McCullough (22:39):

Oh no, this is the good stuff.

Denise Appleby (22:42):

Because we’re talking about rollovers now. And the whole purpose of a rollover is for the assets to retain that tax deferred benefit, right. That’s the reason why we are saving in these accounts. But we’ve just talked about the fact that not every amount is eligible for rollover.

Denise Appleby (23:02):

If it’s your IRA, it’s on you to figure it out. If it’s your 401(k), your plan administrator must tell you how much of what you’re taking is eligible to be rolled over. One of the things we always want to bear in mind is that beneficiaries, unless they’re the surviving spouse of the account owner, they can’t do a rollover. The only type of rollover they can do is if they inherit a 401(k) or 401(k) type plan, they can do a direct rollover to a beneficiary IRA.

Denise Appleby (23:32):

And Kevin, they still need to take any RMD that’s due before the rollover. So, let me tell you a real-life story that happened before Secure Act, but still applies today. This woman inherited two IRAs from her aunt, and she had a conversation with her husband. Back then you could stretch distributions over your life expectancy. Now most people can’t do that. Most beneficiaries can’t do that.

Denise Appleby (23:55):

But you can still spread it out over 10 years in most cases. So, she and her husband said, “You know what? We’re okay. We don’t need the funds. Why don’t you just keep it in a beneficiary IRA?” So, she goes to bank one and she says, “Me and my husband talked, we don’t need the money. I just want to roll it to an IRA.” Mistake, using the word roll. You’ve got to be very careful when you’re having conversations with IRA custodian because whatever you tell them, they believe you.

Denise Appleby (24:27):

And so, you got to make sure that if you want to, as a non-spouse beneficiary, the only way you can move an inherited IRA is as a transfer. So, you’ve got to say transfer, right. And ideally you want to initiate the transfer on the receiving end.

Denise Appleby (24:42):

Anyway. She went to bank one, she told them what she wanted to do. Now here’s what’s dangerous. When you go to the bank, they are some of the nicest people that you can deal with. And so, you know,   they smile and they make you feel comfortable and you relax and you sign a form that they put in front of you that you asked for.

Denise Appleby (25:03):

But where they should have said to you, “No, you can’t do this based on what you’re explaining.” But they just want to get you out, so they get to the next person.

Denise Appleby (25:11):

So, she takes the check, goes to bank number two because her aunt had the assets at two different banks. What do you think happened?

Stephanie McCullough (25:20):

They said the same thing.

Denise Appleby (25:23):

Right. So, in her mind, this amount is not included in income. So, she did not include it in income. Then the IRS says, “Where’s my money?” She says, “I don’t owe you because I rolled it over.” IRS says “You can’t do it.” She took the IRS to court, and she lost.

Denise Appleby (25:40):

Now when something like that happens, in addition to the 6% excise tax for ineligible rollover, because she didn’t fix it because she didn’t think it was a mistake. If you take a distribution from pre-tax funds and you don’t include it in income for that tax year, you’re going to owe the IRS penalties for failure to include taxable amount in income.

Denise Appleby (26:02):

So, she’s getting hit from all different sides, you know. We have an expression in Jamaica that “Everywhere you turn, macka jook you,” meaning you go left, you go right, you go up, you get down, you get poked.

Denise Appleby (26:16):

I can’t tell people enough how important it is to talk to an advisor who understand IRAs, talk to you guys because are you going to give them the answer right off the bat, and a hundred percent of the time? Probably not. But you know where the pitfalls are.

Denise Appleby (26:33):

There’s certain things that has to be done when you’re moving your IRA and we are here to make sure that it’s smooth sailing for you.

Stephanie McCullough (26:42):

So, to be clear, that failure to include income on your tax return as a separate penalty from any excise tax?

Denise Appleby (26:50):

Yes.

Stephanie McCullough (26:51):

Yeah. Thus, the getting poked up, down, left and right.

Kevin Gaines (26:56):

So, Denise, you brought up beneficiary IRAs and we’ve been talking about them. So, let me ask the question this way. You’re married, unfortunately, let’s pretend you love your spouse. So, unfortunately your spouse dies on you in say, July and he hasn’t taken his RMD yet. Does that mean you don’t have to take an RMD that year because well he’s dead. He can’t take the RMD and it’s now your money because you are the beneficiary on the IRA. Does it work that way by any chance?

Denise Appleby (27:28):

I’m so glad you asked that question because there’s so much confusion about it. Yes. If my husband is of RMD age and dies and didn’t take his RMD for this year, then I have to take it. But before I answer that, I want to give people a little tip. If he was just age 73 this year, he would’ve had an RMD for this year had he lived, right. But since he died before April one of next year, that RMD goes poof.

Stephanie McCullough (27:55):

If it’s the first year, you need to take an RMD.

Denise Appleby (27:58):

Exactly, because he died before what is referred to as a required beginning date. But let’s assume that he’s 75, right. Didn’t take his RMD, then I have to take it. And that RMD for him has to be calculated as if he lived through to the end of the year.

Denise Appleby (28:15):

So, we’re going to pretend that he’s alive when we’re calculating the RMD. But I have to take it and it’s going to be included in my income now before Secure 2.0. I had until the end of this year to take it down being such a scenario.

Denise Appleby (28:31):

And part of what I know we agree on, Stephanie, you and I talked about this, and you said that’s so unfair to expect someone who’s grieving to have the wherewithal to say, “Oops, oh, I need to go do that RMD.” And so, Congress agreed. And technically the deadline is still in it this year, but now there’s an automatic waiver of the excise tax. If the beneficiary takes that RMD for the year of death by their tax filing due date plus extension or the end of the following year, whichever is later.

Stephanie McCullough (29:03):

Hm, hm, Okay! So, that’s a little relief. A little wiggle room. But still, you got to be aware.

Denise Appleby (29:08):

Still you got to be aware. Still you got to be aware. There are a lot of people who are going to be inheriting a lot of accounts. You’ve seen the numbers. They’re talking about the great wealth transfer, which includes retirement accounts because there’s $40 trillion in retirement accounts right now.

Denise Appleby (29:25):

The majority of it are owned by baby boomers. And you know what the age of a baby boomer is. I think the youngest baby boomer is like 60, 61. And the life expectancy of average American is 77, 78. So, a lot of people are going to be inheriting accounts.

Denise Appleby (29:41):

And this is a time when they want to start having conversations with their financial advisors about what do I do when? And I want to say to to consumers, do some of the planning before you die. Because if your beneficiaries don’t know what to do, then they’re going to mess things up. And if your beneficiaries don’t know that they inherit your retirement account, they’re not going to know that they’re supposed to take RMDs.

Denise Appleby (30:07):

And so, they’re going to owe excise taxes to the IRS. The good news is that if, whether you’re a beneficiary or an account owner, if you miss your RMD deadline, the 25% excise tax that applied, it used to be 50%, it was reduced to 25% as of 2023. They’ll waive that excise tax if the deadline was missed due to reasonable error. Ah!  You got to file form 5329. You got to write a letter saying made a mistake, blah blah blah. Why! And follow the procedures on the form? And they very likely waive the excise tax.

Kevin Gaines (30:46):

And to the IRS’s credit, they have a very long track record of being very understanding. In many situations when you write that letter, as long as you weren’t trying to game the system, you made an honest mistake. The IRS.

Denise Appleby (31:00):

I a hundred percent agree. I have never been involved in a case where the IRS have denied a request. Well, let me qualify that. There have been only two instances where one, the IRS at first said no, turns out the CPA filled out the form 5329 incorrectly.

Denise Appleby (31:18):

But once that was corrected, it went away. And there was a recent time, which was so funny, the IRS sent a letter to the CPA saying, “We’re not waiving it for your client. Because we’ve been here before several times.” And he said, “Denise, this has never happened before.” When he called the IRS, they said, “Oh, we have a new employee and they made a mistake. You can ignore that letter.” Can you imagine [Stephanie McCullough overcross: Yeah]?

Kevin Gaines (31:47):

That would get me panicking.

Denise Appleby (31:50):

Yeah. So, you’re right. You know. One of the things people usually ask me, Kevin, is “How are they going to know that I’m supposed to take an RMD?” Well, the IRA custodian is supposed to tell the IRS custodian, they’re going to tell them on your form 5498 there’s a box that they check.

Denise Appleby (32:08):

And so, the IRS has a document matching system. Custodian says you are supposed to take an RMD, but I don’t see a 1099R, which is a form that is used to report those RMDs, what’s going on, right. And some custodians will even include the RMD amount.

Denise Appleby (32:27):

Now what the IRS have said to custodians is this responsibility ends with owner accounts. It does not extend to beneficiary accounts. And you know why? Because the beneficiary account involves too many steps to correctly calculate the RMD amount.

Stephanie McCullough (32:48):

Yeah. We know.

Denise Appleby (32:52):

And so, the question becomes though, what if your custodian is nice enough to help you with the calculation? Because some of them are, they want to do the right thing. But I’m finding out that I’d say above 80% of the RMD calculations that have audited for beneficiary accounts are incorrect. Yes.

Denise Appleby (33:13):

Yes! Here’s why. When you’re calculating the RMD for an account owner, it’s usually very simple. You take the previous year end for market value, you divide it by the life expectancy factor for the RMD year. The only adjustment you might have to make is if someone took a distribution last year, roll it over this year, something like that, right.

Denise Appleby (33:33):

But when it comes to a beneficiary account, the question becomes what rules were you subject to? Were you subject to the five-year rule, the 10-year rule, the life expectancy rule, and oh, were you the only beneficiary on the account?

Denise Appleby (33:46):

Because if you were not the only beneficiary and come December 31st for the following year, maybe we’re going to treat all of you as one using the life expectancy of the oldest beneficiary to calculate any RMDs. Custodian is not asking that question, right.

Denise Appleby (34:03):

Here’s what the custodian is also not asking in my experience, are you the primary beneficiary? Because when a beneficiary walks into an office or calls an IRA custodian and say, “I need help with my inherited IRA,” the default assumption is you oh inherited it from the original owner. Right?

Stephanie McCullough (34:25):

Right.

Denise Appleby (34:25):

But you guys know that. You got to ask “Well who did you inherit it from and did that person inherited from another person?” [Stephanie McCullough overcross: Yeah] Because I had a recent case where the advisor said, “Denise, my client is a surviving spouse of the IRA owner.” Fine. Right now, you’re thinking, oh, spouse beneficiary, they have all the options. They can put it in their own, they can switch it over their life expectancy, et cetera.

Denise Appleby (34:51):

But then if you know what you guys know, you’re going to say, “Okay, she inherited it from her spouse but did he inherit it from someone else?” And it turned out that he did because he had inherited it from his mother [Stephanie McCullough overcross: Aha] which changed the answer completely.

Stephanie McCullough (35:06):

Right. I have a client with two daughters and their father passed away and left his IRAs to the daughters because he and mother were divorced. And two of the IRAs each daughter has were originally father’s, but one was originally grandfather’s that father inherited and then granddaughters.

Stephanie McCullough (35:26):

And they recently became clients. And I asked for the CPA’s RMD calculation, and I think it was wrong because I think he was using the girl’s life expectancy. I’m like, but you got to use dad’s life expectancy because it was granddads. Right.

Denise Appleby (35:39):

You see what I mean?

Stephanie McCullough (35:40):

Yeah.

Denise Appleby (35:42):

You see what I mean? And the question becomes then, so a mistake is made, they probably took less than they need to because they’re using a longer life expectancy. Who’s responsible for paying the income taxes, the excise tax on that?

Stephanie McCullough (35:55):

The 16-year-olds.

Denise Appleby (35:57):

Right.

Kevin Gaines (35:58):

And where’s the 16-year-old going get the money to pay the excise tax.

Denise Appleby (36:02):

Yeah.

Denise Appleby (36:03):

All she’s got is the IRA.

Kevin Gaines (36:04):

They’re going to get it from the IRA [Stephanie McCullough overcross: Yeah]. And guess what happens when you take money out the IRA?

Denise Appleby (36:08):

Exactly. And now the CPA might be saying, “Oh, I’ll file a form 5329, but you got to pay to have that done.”

Stephanie McCullough (36:16):

Not fun. So much to keep in mind. And as we always tell people,, right you don’t have to remember all these little details. You’ve just got to remember that these things exist and kind of stop and ask yourself, “Oh! Wait a minute, this is the IRA that my father inherited from his sister, so maybe I need to double check the calculations,” or just remember that these things are out there and you need to ask the question.

Denise Appleby (36:38):

Yeah, yeah.

Kevin Gaines (36:40):

You can also understand that everything we’ve talked about, every story you’ve told us here, Denise could literally be an episode itself. Because there’s so many things [Stephanie McCullough overcross: Yeah] to go through.

Stephanie McCullough (36:52):

But only Kevin would listen.

Kevin Gaines (36:56):

Kevin would eat [Stephanie McCullough overcross: I know] it all. I’d turn each of those into a three-hour episode if I could.

Denise Appleby (37:02):

Yeah.

Stephanie McCullough (37:04):

See, dear listeners, I’m sparing you.

Denise Appleby (37:06):

You know what’s a hot topic right now?

Stephanie McCullough (37:08):

Tell us.

Denise Appleby (37:09):

Very hot, hot, hot, hot. Roth conversions.

Stephanie McCullough (37:12):

Yes. Right, yeah. We’re talking a lot of people about it.

Denise Appleby (37:15):

Yeah. Everybody wants a piece of that because what we are talking about is a potential for tax-free income during retirement. And as you guys do, I always say, make sure you get a suitability assessment done. Because it’s not for everybody, despite what some people are saying, it’s not for everybody, right. [Stephanie McCullough overcross: right]

Denise Appleby (37:34):

But let’s assume that you are an ideal candidate for a Roth conversion. Here’s some key things to remember. If you’re doing a Roth conversion for this year, you want to have the funds leave the traditional account this year. That seems simple.

Denise Appleby (37:52):

But when we think about the fact that there are two ways to do a Roth conversion, then it becomes even more important. We have a direct conversion and an indirect conversion. So, let’s talk about a direct conversion. First you go to your IRA custodian, you said, “Hey, convert my traditional IRA number one to my Roth IRA A.” Usually both transactions are done at the same time. There’s no lag of time in between.

Denise Appleby (38:20):

So, if you get it in by their deadline, then it gets done for this year. But there’s a second way to do a conversion that’s indirect conversion where you take a distribution from your traditional IRA or traditional 401(k) account and you roll it to your Roth IRA within 60 days.

Stephanie McCullough (38:40):

Hmm! So, they send you the check from the traditional 401(k), right, instead of going directly. Is that how it works?

Denise Appleby (38:46):

Instead of going directly [Stephanie McCullough overcross: Yeah]. Now let’s say your IRA custodian sends you a check for a hundred thousand this year. You want it to be a conversion for this year. You have already met requirement number one, which is the funds have left your traditional account for this year, right. Then you have 60 days to roll it over, which could take you into next year depending on how late you take that distribution. And that’s perfectly fine.

Denise Appleby (39:11):

But here’s something that you have to bear in mind if you’re doing it from your traditional IRA to your Roth IRA, you got to make sure the custodian knows that it’s a Roth conversion. Because if you don’t, they’re going to treat it as a regular rollover. And that’s going to red flag with the IRS.

Denise Appleby (39:28):

The IRS have admitted that this is one of the number one mistakes that are made by IRA custodians. Yeah, when taxpayers do indirect conversions. Unfortunately not everyone of the IRA custodians is familiar with the fact that it can be done that way. And even when the taxpayer says “This is coming from a traditional IRA,” they still report it as a regular rollover on the form 5498 instead of a Roth conversion. So, you got to push, escalate the issue to someone who’s going to do it right.

Stephanie McCullough (40:00):

So, that’s going to cause trouble if it gets reported the wrong way.

Denise Appleby (40:03):

It’s going to cause trouble, right. Because here we are, you’re reporting a rollover on your 5498 for your Roth. Are you reporting a rollover for your traditional IRA too? There we have the IRS saying “You are doing more than one IRA to IRA rollover. We might have a problem.” When you really don’t because that other one is a Roth conversion.

Denise Appleby (40:26):

One more thing on a Roth conversion, sometimes an individual might say, see my traditional IRA over there with a hundred thousand dollars, convert it to my Roth but withhold 20,000 for federal income tax. The $20,000 withheld for federal income tax is not a conversion. That’s a regular distribution, right. So, it doesn’t hit the Roth, doesn’t get the benefit of the tax-free growth, eventual tax-free regrowth.

Denise Appleby (40:55):

And also, if you’re under age 59 and a half, that 20,000 is also going to be subject to the 10% additional tax on early distributions. Whereas the 80,000 in my example that hits the Roth, that’s automatically exempt from the 10% early distribution penalty.

Stephanie McCullough (41:15):

I mean how do you keep it all straight Denise?

Denise Appleby (41:17):

You know! Well, this is what I do, right. And one of the reasons why I admire you guys is because you do the IRA stuff, you do the investing and you look at the insurance and the stuff that I’m looking at and I’m saying “I don’t want anything to do with that, I’ll talk to a financial advisor.” Whereas for me, this is what I eat, sleep, and drink about.

Stephanie McCullough (41:39):

Which is why we have you on speed dial.

Denise Appleby (41:42):

Yeah, yeah. What I like about you guys too is that you don’t dismiss IRAs and 401(k)s. So, you were able … when a client comes to you and say, I want to do a certain transaction with my IRA, the light bulb goes off and your approach is, well let’s have a more deeper conversation because there are certain things we might need to do.

Stephanie McCullough (42:07):

Yeah, yeah. As we always say, the answer is always, it depends.

Denise Appleby (42:12):

A hundred percent. Yeah. Do we have time to talk about qualified charitable distributions?

Stephanie McCullough (42:18):

Let’s do it, let’s do it. One of our favorites.

Kevin Gaines (42:19):

You know I want to.

Denise Appleby (42:22):

So, there are some people who are charitably inclined, and they have IRAs and as long as they’re at least age 70 and a half on the day that they’re doing that distribution, they can have it treated as a qualified charitable distribution or QCD, right.

Denise Appleby (42:37):

How QCD works is you can donate up to a hundred thousand dollars. It’s indexed for inflation, it’s 105 for 2024, you can donate up to that amount from your IRA to an eligible charity. There are certain rules that have to be followed. One of them is you don’t exceed that amount. That’s a per person limit.

Denise Appleby (42:57):

And the check has to be made payable to the charity. They can give it to you, and you deliver it to the charity, but it has to be made payable to the charity. Once it meets all those requirements, then it’s excluded from income.

Denise Appleby (43:10):

My aunt goes to church every Sunday, and she digs in her pocketbook, and she makes her tithe an offering. And so, you know, I said to her, “There’s an easy way to do this.” Have your IRA custodian send a check to make a check payable to the church and it’s excluded from income instead of you taking your RMD every year and you got included in income.

Denise Appleby (43:31):

Now that sounds simple enough, but here’s some things that we want to think about. The fact that some IRA custodians have given checks to IRA owners, like my aunt saying, “You can just write a check to cover your RMD or your QCD.”

Denise Appleby (43:48):

And she thinks, “Oh that’s great, so I don’t have to go down to the bank and deal with the bank people.” Right. But here’s the problem. If you’re doing a QCD for 2024, for example, or any year that you’re doing it for, the check has to clear your IRA by the end of that year.

Denise Appleby (44:08):

And so, I say to her, “Aunt, go to the bank and have them draw a check from your IRA and make it payable to the charity.” Because then you make sure that it leaves your IRA and she’s saying, “Can I just write a check?” But here’s a problem with writing checks. And I know this because I donate time to charity. I volunteer, that’s the word I’m looking for.

Denise Appleby (44:33):

We don’t have time to go to the bank every week, especially for small charities. And so, we take those checks and deposit them like every three, four months. So, when she writes a check in December and she’s thinking, this is my IRA, this is my QCD or both, if it doesn’t get cashed by December 31st, then you have missed your RMD deadline, and you don’t have a QCD for this year.

Denise Appleby (45:00):

So, the only way I could recommend writing a check is if you take it to the person who’s going to take it to the bank and sit there and say, I’m not leaving until … yeah, I want to see you put it in that I bank account so that it clears my account by the end of the year.

Denise Appleby (45:18):

So, just be careful with that. And of course, there are other rules that you need to think about for QCD. You can do it from any traditional SEP or simple IRA for SEP and simples. Just got to make sure that there’s no SEP or simple contribution that was made to the account for that year. You can also do it from inherited accounts. You can do it from Roth accounts too. It might not make sense, but you can do it from Roth accounts.

Stephanie McCullough (45:41):

Can I ask quickly if in the QCD writing the check situation, if the custodian writes the check, there’s still a possibility that the charity doesn’t deposit it until January, right. Don’t you have the same problem?

Denise Appleby (45:55):

Thank you for that clarification. When the custodian writes the check, it’s debited from the account.

Stephanie McCullough (46:00):

Right away.

Denise Appleby (46:02):

So, let’s say six months later, it’s not cashed [Stephanie McCullough overcross: right], what the custodian will do is reissue a replacement check. The replacement check is going to be a non-reportable transaction. So, the original distribution stands.

Stephanie McCullough (46:16):

Okay. Okay.

Denise Appleby (46:17):

So, you have met your RMD, and you have satisfied your QCD. Good question. I’m so glad you asked that. Can I mention one other beneficiary thing before we go?

Stephanie McCullough (46:29):

Of course.

Denise Appleby (46:31):

For pre 2020 inherited accounts, if the account owner died before the required beginning date, the five-year rule could have applied, or they could have been eligible to take distributions over their life expectancy if they were an individual because then they would be a designated beneficiary.

Denise Appleby (46:48):

But there are a lot of documents IRA doc agreements, 401(k) documents, or in all cases where the beneficiary is not a designated beneficiary, the five-year rule would’ve applied. And so, for anyone who inherited an IRA or 401(k) in 2018, and they’re subject to the five-year rule, 2024 is their RMD year, meaning the entire remaining balance has to be withdrawn, right.

Denise Appleby (47:16):

Now you’re probably counting saying “Denise, you can’t count because it’s six years, not five.” But remember that RMDs were waived for 2020, you know. COVID CARES Act. So, we are not counting 2020 when we’re counting RMD years. So, just remember, check to see if you’re subject to the five-year rule. Don’t assume that you weren’t.

Denise Appleby (47:37):

I had a case with a spouse beneficiary who inherited a couple million dollars from her spouse. He died before he was supposed to start taking RMDs. And would you believe that the plan defaulted to the five-year rule? Five years.

Stephanie McCullough (47:52):

Because that’s what the document said?

Denise Appleby (47:53):

That’s what the plan document says.

Stephanie McCullough (47:56):

And that rules, yeah.

Denise Appleby (47:56):

Yeah. Don’t assume that because the regulations say as a beneficiary you have certain options because what the regulations also say is that if the account owner died before the required beginning date, but plan document could say, we don’t want you in here and we’re going to kick you out right away. And if you don’t, we’re going to send you a check for your balance.

Denise Appleby (48:17):

Which is what happened to that spouse beneficiary. She got a check for a couple million dollars with a letter that says, “Oh. You know. Our sympathies on the death of your husband, but here’s your RMD and you can’t roll it over.” Can you imagine?

Stephanie McCullough (48:30):

Ouch.

Denise Appleby (48:31):

Yeah.

Stephanie McCullough (48:33):

Yeah. So, how on earth would you know then, does she have to go back and find the plan document from her deceased spouse’s 401(k) to figure out if she’s subject to the five year?

Denise Appleby (48:44):

Yeah. Once they’re notified of the death, they usually send out a letter, but we’re talking about you are grieving and all the paperwork is coming in from everywhere. You’re not looking at that [Stephanie McCullough overcross: Yeah]. But that’s when you go to your advisor and your advisor is going to calm everything down and call them and say, “Give me a copy of the summary plan description or SPD.”

Denise Appleby (52:49):

And the summary plan description is going to explain what the options are and the–  any communication that they send out should also include that explanation.

Denise Appleby (49:18):

One of the things that we usually say to beneficiaries is don’t touch the funds until you talk to us, right. Because we don’t want where that woman inherited IRAs from her aunt. We don’t want that scenario occurring. But it’s good to wait. But it’s not good to wait too late because then you have the scenario that I’m talking about where a spouse beneficiary, who should be able to do almost all the options, found out that she had none because she didn’t take action timely.

Stephanie McCullough (49:49):

Yeah. I mean there are real consequences to this stuff. That’s why we keep talking about it.

Denise Appleby (49:56):

Yeah. It’s terrible. You are sitting there; you’re looking at your IRA statement and it says you have $2 million in your IRA. But when someone like Stephanie and Kevin audit your IRAs, they realize that you made some huge mistake years ago.

Denise Appleby (50:12):

And this is not really an IRA, the statement says it, but it’s not because you broke the one per year rollover rule. You engage in a prohibited transaction; you missed the 60-day deadline. There’s so many ways that the statement that you’re looking at could be a lie.

Stephanie McCullough (50:29):

Ouch. And with that, dear listeners — Denise, give us something positive, something optimistic to leave people with.

Denise Appleby (50:40):

Another Jamaican expression, which I think is actually international prevention is better than cure, right. Don’t feel overwhelmed by all of this. I mean, would you remove your own kidney? No. You would go to a professional to get it done and you have worked so many years to save for retirement. Don’t let it all go down the drain because of one mistake, right.

Denise Appleby (51:07):

And just like with everything else, there are people who specialize. You want to talk to an advisor who specializes in IRA. And so, they’re IRA smart and they know the answer and know where to get the answer in time.

Stephanie McCullough (51:20):

They know Denise. Alright, Denise Appleby, thank you so much for being with us. We really appreciate your time and expertise and your generosity with sharing.

Denise Appleby (51:32):

Thank you so much. This was so much fun. Thanks for having me on.

Kevin Gaines (51:37):

Denise, where can people find you to at least follow your information? Because you put a lot of good stuff out on LinkedIn and elsewhere.

Denise Appleby (51:45):

If they google Denise Appleby, they’ll find me. But if they go to deniseappleby.com, it takes them to my website. It’s not EE because I wouldn’t be here with you. I probably would. I love this stuff so much. Meaning if it’s EE, I would own the restaurant, right? Applebee’s.

Stephanie McCullough (52:01):

Oh! Got it.

Denise Appleby (52:03):

I see you looking like, “What’s she talking about?” So, it’s A-P-P-L-E-B-Y right and it takes them to my website.

Stephanie McCullough (52:11):

Perfect.

Kevin Gaines (52:12):

Fantastic. Thank you.

Denise Appleby (52:13):

Thanks for having me on. You guys are fun.

Stephanie McCullough (52:18):

We try to make it a little bit fun because it can be heavy.

[Music Playing]

Kevin Gaines (52:26):

Well, Stephanie, you’re not right next to me, so you’re not going to kick me for saying this. But I am going to say there was a lot to unpack in this episode. And this time, it’s not hyperbole.

Kevin Gaines (52:40):

First thing is rollovers versus transfers. I understand you talk to anybody on the street, they’re going to say it’s the same darn thing and in casual language it is. But when you’re talking about retirement accounts, these are two very distinct terms.

Kevin Gaines (53:02):

Rollover means you get the check in your hand made payable to you, and it’s incumbent on you to do something with the money. The transfer is when one custodian sends it to the other custodian, whether it’s your 401k, sending it to your IRA or from one IRA to another.

Kevin Gaines (53:20):

But I want to say sometimes they’ll send you the check, but it’ll be made payable to the new custodian. So, just because you literally get a piece of paper in your hand, it still could be a transfer. Thus, you’re not subject to that 60-day rollover restrictions. And if you have any questions on that, always with everything, talk to us. Reach out.

Stephanie McCullough (53:45):

Transfer goes directly from one custodian to another for your benefit of course, right. Whereas rollover comes to you, made out to you, and it’s your responsibility to meet that 60-day window if you intend to keep it within an IRA structure.

Kevin Gaines (54:03):

Correct.

Stephanie McCullough (54:04):

Fair. Okay. So, one of the things that Denise kept mentioning that I appreciate is that she talked about being IRA smart, right. And there really are just layers and layers and layers of rules and regulations and law and IRS code on this stuff.

Stephanie McCullough (54:18):

So, yes, there are tax benefits and anytime there are tax benefits, there’s going to be quid pro quos and rules and restrictions. And the IRA rules and retirement account rules are complicated. So, even if your eyes started glazing over with some of the details, just to remember, this stuff is complicated.

Stephanie McCullough (54:35):

You want to double and triple check, and you want to talk to people who know what they’re talking about because it was so interesting that you are the administrator, especially of your IRA, your individual retirement account. It’s on you to make sure you’re following the rules.

Stephanie McCullough (54:50):

So, don’t feel bad questioning, asking again, asking for a second opinion, a third opinion. This is going to serve you well. Dear listeners, we hope you found this a value. We’ll talk to you next time. It’s goodbye from me.

[Music Playing]

Kevin Gaines (55:04):

And it’s goodbye from her.

Stephanie McCullough (55:08):

Be sure to subscribe to the show and please share it with your friends. Show notes and more information available at takebackretirement.com. Huge thanks for the original music by the one and only Raymond Loewy through New Math in New York. See you next time.

Voiceover (55:23):

Investment advice offered through Private Advisor Group, LLC, a registered Investment Advisor. Private Advisor Group, American Financial Management Group, and Sofia Financial are separate entities. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. This information is not intended to be substitute for individualized tax advice. Please consult your tax advisor regarding your specific situation.