Top Trending IRA Questions (and Answers) from ERISA Consultants
By Jodie Norquist, CIP, CHSP
In 2021, Ascensus’ ERISA consultants fielded approximately 40,000 calls from our clients who subscribe to our 800 Consulting Lines. When in doubt over tough IRA, HSA, Coverdell ESA, and retirement plan questions, we hope you pick up the phone and reach out to us so we can alleviate your stress and help you find the answers to your technical questions—and potentially help protect your financial organization from IRS penalties—not to mention customer dissatisfaction.
We asked our experienced IRA consultants what their trending IRA questions were last year and we compiled a list, along with their responses. What questions will our financial organization partners face in 2022? Unfortunately, the future remains unknown. What we do know is that our consultants will be here for your technical support, ready to take your call.
My client is ineligible to make a regular Roth IRA contribution. Can he make a nondeductible Traditional IRA contribution and do a tax-free conversion?
Possibly. This process is most often referred to as a “backdoor Roth” contribution. An IRA owner whose modified adjusted gross income exceeds the applicable Roth contribution limit for his tax filing status can make a nondeductible contribution to a Traditional IRA and then convert those assets to a Roth IRA. The IRA owner does not have to pay tax on the portion of the conversion attributable to nondeductible assets. The ideal candidate for a backdoor Roth contribution is an individual who does not have any other Traditional or SIMPLE IRA assets and completes the conversion before taxable appreciation can accrue in the Traditional IRA. IRA owners should seek competent tax advice before they complete this type of transaction.
Can an employer set up a SEP plan as a Roth SEP plan?
No, each employee who is eligible to participate in a SEP plan must establish a Traditional IRA to receive and hold SEP contributions. Employers cannot deposit SEP contributions into an employee’s Roth IRA.
If a SEP contribution is made for the prior year, would we report the SEP contribution in the year that it is received or for the tax year that it is for?
Financial organizations must report SEP contributions in the year that they were received. For example, if a SEP contribution is made in March 2022 for tax year 2021, the amount should be reported in Box 8, SEP contributions, on the 2022 Form 5498, IRA Contribution Information. It is up to the employer to indicate on its tax return that the SEP contribution was for the prior year.
Does my client have to wait five years before she can take a distribution from her Roth IRA?
No, she can take a distribution at any time, but the distribution may be taxed and penalized if it Is not a qualified distribution. A qualified distribution is a distribution that occurs after the Roth IRA owner has met a five-year waiting period and has met one of the following events: attainment of age 59½, disability, first-time home purchase, or death. Roth IRA assets are distributed in the following order.
Contributions, including qualified designated Roth account rollover assets, which are treated as contributory basis
Conversions and non-Roth employer plan rollover assets, by year, with taxable assets distributed before nontaxable assets
Earnings.
The contributory basis is always distributed tax- and penalty-free, regardless of whether the distribution is deemed to be qualified or nonqualified. A nonqualified distribution of taxable conversion or retirement plan rollover assets that occurs within five years of the year of the conversion/rollover is not taxable, but if under age 59½, is subject to a 10 percent early distribution penalty tax on the taxable amounts converted or rolled over unless an exception applies. Once that five-year period has been met, these assets can be distributed tax- and penalty-free regardless of age.
Any portion of a nonqualified distribution that includes earnings is taxable. Unless the Roth IRA owner meets an exception, the earnings may also be subject to the 10 percent early distribution penalty tax.
I have an IRA owner who died this year before he could take out his required minimum distribution (RMD). What should we do with his RMD?
The deceased IRA owner’s beneficiaries must distribute their share of the RMD by December 31, 2022. For example, let’s say Jack Johnson died on January 10, 2022, before he could take out his 2022 RMD. Jack had named his two children as beneficiaries of his IRA. Because they each inherited 50 percent of the IRA, they should each withdraw 50 percent of the total RMD amount. The financial organization should report the distributions as death distributions (code 4, Death) under each beneficiary’s name and Social Security number, not under the decedent’s.
Need More Answers to Your Frequently Asked IRA Questions?
These questions—and many more—can be found in Ascensus’ IRA Fact Book. The IRA Fact Book, updated twice a year, is a concise, user-friendly reference tool that reflects the most common questions that IRA administrators receive, with answers provided by Ascensus’ attorneys, CPAs, and certified IRA consultants.
